- Early education of SMSF trustees is key to reducing documentation non-compliance
- SMSF professionals can reduce liability through engaging specialist advisors and lawyers
- Technology is making documentation compliance easier, but not less important
Peter Townsend, Principal of Townsends Business & Corporate Lawyers, has worked in the SMSF industry for decades, and sees incorrect documentation as a leading cause of non-compliance in Australian SMSFs. Townsend shares his strategies for overcoming common challenges and ensuring SMSF compliance.
Education is a valuable tool
According to Townsend, SMSF trustees have traditionally viewed documentation compliance as a nuisance. He argues trustees often do not fully understand the requirements, and upon learning them express frustration towards what they consider to be unnecessary complexity.
"Trustees often don't realise the extent of documentation requirements, which is understandable because - in their eyes - why should they have to fill out all these complicated forms for what is often essentially moving money from one pocket to another?" Townsend explains.
How can SMSF professionals help trustees avoid incorrect or a lack of documentation compliance?
"The solution is education. Advisors need to spend time with their clients early on to explain the requirements in a way they'll understand. Advisors need to clearly spell out what trustees can and cannot do, and what actions require documentation," Townsend says.
Understanding professional liability
An increase in legal cases surrounding incorrect documentation of personal estates highlights the growing extent of this issue, and raises the concern of the liability placed on SMSF professionals. For Townsend, this proves advice should come from SMSF specialists.
"There's more risk when advice comes from non-specialists, who might understand the general concepts, but can't substitute the reliable and quality advice that specialists provide," Townsend says.
"The case law has shown that the documentation of SMSF are not as good as they should be, nor are the management strategies behind them."
To reduce professional liability associated with imprecise documentation, Townsend advises SMSF professionals to only use lawyer-generated documents.
"Most accountants don't have the professional indemnity insurance to cover the risks of using documents from less reliable sources, such as online providers. Accountants' PI insurance doesn't cover the provision of legal documents because providing legal documents is not accountants' core capability. Accountants should employ lawyers to supply documentation that they know will be first class," Townsend says.
Documentation in the digital age
Technology is changing how SMSF trustees and advisors manage funds, however Townsend argues that correct documentation is no less important.
"A common misconception is that technology has done away with the need for documentation. In reality, digital documentation has made compliance more efficient and convenient, but certainly has not removed compliance requirements," Townsend argues.
Digital signature technology has the potential to disrupt SMSF documentation processes significantly. However it appears to have stumbled in its implementation, something Townsend attributes to slow regulatory adaptation.
"Currently, digital signatures cannot be used for important compliance documents, yet they are widely used for less significant ones. This has created confusion and uncertainty as people aren't really sure when use is permitted. The government needs to produce a single law that can be applied nationally to resolve this situation," Townsend argues.
Looking ahead, Townsend is confident in the future of SMSFs. While document compliance is an area for improvement, he believes with the right specialists providing advice, trustees can be assured.
"SMSFs are still a great savings vehicle, there aren't many structures that receive such a great tax concession. Over one million Australians use SMSFs, so the government has an interest in improving governance. With the right people providing advice, there's no reason not to use an SMSF as part of an overall wealth management strategy," Townsend says.