COURTS AND REGULATORS, CASE STUDIES, TALKING HEADS, OSTRICHES AND FAKE NEWS

COURTS AND REGULATORS, CASE STUDIES, TALKING HEADS, OSTRICHES AND FAKE NEWS

Let me be straight up with you and give you my million-dollar advice on how to have a successful and profitable SMSF career. 

“Know your SMSF stuff well”

Pretty simple and I have been saying it for 25 years now. But if you know your stuff then you know how to cut through the BS when a talking head – through one of the industries dallies, trade magazines, on a webinar or at a conference say something you know is, well BS. 

But you need more than a feeling or intuition, you need to know how to call them out. What section are they referencing and don’t let the “I have been doing this for 30 years and I am a lawyer” linework. Bernie Maddof said the same thing to all his investors and at the end of the day, they lost their shirts. The only person who really needs to know their stuff is you so you can sort the wheat from the chaff.

Where do you sit on the Four Levels of SMSF Competency?

1.      Unconsciously Competent

This state of being is when you automatically know how to do something. For example, we all know how to tie a shoelace and do it automatically and so we are at the uppermost skill level – we are unconsciously competent, it is deeply embedded in our unconscious mind and can be drawn upon at will. For me, I am lucky enough to have a photographic memory so I can remember legislation by closing my eyes and picturing it – which helps me to apply it across a wide range of client situations. A good skill to have and I am blessed.

2.      Consciously Competent

This is when we know our stuff and know how to complete a skill but may need to do some research, talk to a mentor or adviser and see if we are on the right track. I see this every day with our Strategist advisers who ask me all manner of questions. They look at a set of client circumstances, do some research, come up with one or more strategies and then pass it by me to check the strategies validity. And for the most part, it is normally 80% there. I can add the cream on top simply because I have been doing this day in and day out for a long, long time. But at the consciously competent level, you know your stuff and can deliver to clients.

3.      Consciously Incompetent

I am a good skier and have been skiing around the world since I was 21 and love it. But to my chagrin, my daughters love snowboarding and one day I decided to hire a great snowboard teacher to teach me how to snowboard. As a skier I know the balance, I have seen boarders work for their boards and guessed it wouldn’t be that hard. Dumb move. I was shocked once I started applying my knowledge to the skill of snowboarding. Three epic falls and hitting my head saw me stand up, realise I was incompetent and high tailed it back to my skis where I could keep well in front of my children on any given run. 

It is the same with SMSFs and I have trained so many people over time and I love it when their heads turn like Linda Blair in the Exorcist. What they thought they knew wasn’t real but a belief or myth that someone had put into their mind. The one I really love is asking SMSF professionals if an SMSF can run a business and out of 100 – 90 will say absolutely no way. Then I love googling – ATO SMSF running a business and magically the Commissioner of Taxation appears saying an SMSF can run business provided certain criteria are met. Of course, to be competent we learn those criteria and lock them into our unconscious mind. 

And I find the same when I ask how many SMSF advisers, and experienced ones at that, have even gone above the concessional caps for their clients and watch as only 5% put up their hands. Now sticking to the concessional caps is a very limiting belief as for some making a $70,000 concessional contribution costs nothing in tax! 

In fact, what other limiting beliefs have you gathered over the years?

Here’s a good one. The Corporations Act 2001 provides that a financial product is where you give money to someone to invest and you don’t have control over the investment. This means that property and gold are not financial products as the individual can control them. Whereas investment in a unit trust, where you give money to a trustee to invest is clearly a financial product. Strangely a “superannuation interest” of a member is deemed to be a financial product thereby opening a wide range of member interactions such as contributions, taking a lump sum, making a BDBN and starting a pension to be seen or deemed financial products.

But what about an SMSF investment strategy? Well, it does not involve the giving of money to anyone, it is advising a trustee of an SMSF on investment objectives and asset allocation, not specific investments. It is also not a superannuation interest of a member as we are advising the Trustee of an SMSF, not the members. So, without anything else, advising on an investment strategy, without delving into any underlying specific investments, is not a financial product. 

Were you aware of that?

4.      Unconsciously Incompetent

This is the absolute lowest level of skills and unfortunately, it is where most SMSF members sit on the totem pole. Which is good for advisers as they need to have their hands held. But if their adviser is unconsciously incompetent then it is the case of the blind leading the blind.

This whole investment strategy thing that the Commissioner of Taxation has going on really shows up who knows their stuff. Section 52B(2)(f) of the SISA 93 and SISR 4.09 are very, very specific on what is an investment strategy. But here’s the deal an investment strategy is something that is forward-looking and completed at the start of an income year. To produce a document at audit six to nine months after year-end is not a strategy, it is a historical record.  Do you think you could argue in the AAT that it was an investment strategy? Or the Supreme Court?

It’s clearly not an investment strategy and super dangerous. Why? Well if this has been produced by an accountant, adviser or auditor and given to our unconsciously incompetent trustee to sign off than any investment losses in the fund – even market corrections, can be recovered against the person who produced the document claiming it to be an investment strategy – look at Section 54C and section 55(3) and see how the defense in section 55(5) does not apply to historical records as opposed to true investment strategies.

So, what about Courts, Case Studies, Talking Heads, Ostriches, and Fake News

Now that competency it out of the way, let’s go back to the start. In order to have a long and successful SMSF career you need to know your stuff, and that means being at least consciously competent. So how do we do that?

My experience shows there are five ways;

1.      The Courts and Regulators

Anyone who has ever had the pleasure of being part of the Australian legal process, particularly as it relates to SMSFs and taxation, know that the learned judges from the High Court down, know their stuff. They look at a specific set of circumstances, look at the law and then apply it. Simple really and great to see in action. And once it is done, it is done – there are no do-overs unless the losing side can show the judges erred in the application of the law – not the facts. And that does happen but that’s the law.

So, if a case such as Katz v Grossman [2005] NSWSC 934 provides insights into why BDBNs are so weak, then I believe them and work with the Court’s interpretation of the law. The same with the Commissioner of Taxation, I might not agree with all that he says but he has some pretty powerful lawyers and lots of cash to dedicate to trying a case, so I look deeply into all his rulings and guidelines, particularly the examples to find stuff that I can apply. Simple and the strongest way of knowing your stuff as it is backed up by the law and the regulator. If the Commissioner of Taxation and the cases going back to the 18th century say a pension with a reversion beats a BDBN I tend to go with that. 

2.      Case Studies

I went to Sydney Law School and completed a Bachelor of Laws and a Master of Laws. At law school, we had the choice of lecturers talking at us or teachers who went through cases and case studies for the purpose of applying the law to the facts and getting a result. In the taxation module in my Master of Laws, the case studies were 25 years old and it was amazing to see how strategies and answers had changed dramatically over time to the same set of facts because the law changed. But I can tell you being put under pressure by my teachers (and they were the best) to apply the law to a set of facts makes you into a strategist very quickly. Strategise or die.

This is the sole reason that I use case studies as it provides a context for a strategy and a method of application. Without that, we are left with a veneer of strategic knowledge that unless applied, dies. As I learned you can’t snowboard in theory, you must apply the theory to the board and the snow. 

3.      Talking Heads

We live in a world where there is so much noise and everything is squished into a sound bite which is good for entertainment but flying like a dragonfly on a pond doesn’t mean the dragonfly knows what is in the pond. And to tell you the truth, talking heads are there to push a line or drum up business. Think of the last five presentations that you went to and can you remember anything that you put into practise with a client and made revenue from? 

Talking heads have their place but teachers are better – simple. Remember the best teacher you ever had, their passion and commitment to teaching and I bet you they were not a talking head. 

4.      Ostriches

Well enough said on this one, it is right in the lane of unconscious incompetence. Putting your head in the sand is okay for SMSF trustees but in our industry, you will never survive in the long term. It doesn’t matter how big your feathers are or how long your neck is, if you stick it in the sand, you are liable to be hit by something nasty.

5.      Fake News

Do you know that more people do not trust the media than do trust them? Thanks to the internet we can find out the real stuff and call out people’s BS. I saw an article by the New Daily, a propaganda rag for Industry Super Funds, paid for by members, which laid it on thick that LRBAs and property were going to bankrupt SMSFs. They cited facts from a Tax Source that 48% of SMSFs with balances between $200k - $500k was using an LRBA. As soon as I saw that I called BS and went to the March 2019 ATO statistics, the real tax source, and found the statistic was 11%.

Now, why would industry funds put out a blatantly inaccurate article on SMSFs and pushing for immediate action on a property in SMSFs?

The Wrap

I have spent my career learning the law, applying the law and teaching the SMSF law. I had this crazy notion in the year 2000 that I could teach accountants and financial planners, using case studies the actual SMSF laws to make them confident and over time reach the level of unconscious and definitely conscious competence. It is why I was involved in drafting the industry competency training standards for providing SMSF advice. 

So when I get a chance to teach something new on a webinar or better still in a SMSF Strategies day – I start by spending a lot of time building case studies and solutions coupled with integrations with the law so that all participants come away with real skills and competency to advise clients in a specific area for the purpose of helping the client, taking their career to the next level and increasing firm revenue. 

If you want to see how it is all put together make sure you come to my October 2019 SMSF Strategies and Estate Planning Day, I promise your SMSF professionals like will never be the same. Go to https://ilovesmsf.com/roadshow/ to book.

P.S. A certificate does not make you competent. I received a Master of Laws in 1988 specialising in taxation and thought I was king of the mountain but within one month of working at KPMG, I realised I was unconsciously incompetent. I knew the law but did not know how to apply it, that is where experience comes in.