Smsfs

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George J Nowak, of the Charterhill Group, has filed for bankruptcy after the Federal Court in Adelaide froze his assets and those of his wife back in February.
At the time, the <a href="https://www.urban.com.au/news/28647-federal-court-freezes-assets-of-charterhills-george-nowak" target="_blank">court had ordered the surrender of their passports, and restricted their travel outside of the country</a>, while ASIC investigated the collapse of the Charterhill Group.
The Charterhill Group specialized in assisting clients to invest in property with their SMSFs. This left nearly $6 million of super at risk.
Macks Advisory’s Peter Ivan Macks has been appointed as Nowak’s trustee, and he has advised that the bankruptcy came following an appointment of liquidators to companies within the Charterhill Group Lending Solutions International Pty Ltd and Nova Real Estate Pty Ltd.
Nowak, who lodged a statement of affairs with the trustee, listed 31 companies he was director and/or shareholder of.
The statement of affairs was signed and dated 30 June 2014, and lodged with the Debtor's Petition on the same day. The Debtor's Petition was accepted on 2 July 2014.
It is noted that unsecured creditors totals approximately $7 million. This includes a claim in his estate, brought by Nova Real Estate’s liquidators – of approximately $6 million.
Investigations are underway, but return to creditors at this stage is unlikely.
The following companies in the Charterhill Group were placed under external control in February:
•    Lending Solutions International Pty Ltd – liquidators appointed (Andrew Heard and Anthony Phillips of Heard Phillips)
•    Nova Real Estate Pty Ltd – external administrators appointed (Andrew Heard and Anthony Phillips of Heard Phillips)
•    EJ Property Developments Pty Ltd – receivers and managers appointed (Michael Basedow and Leigh Prior of Pitcher Partners)
•    Financial Wellness Pty Ltd – receivers and managers appointed (Michael Basedow and Leigh Prior of Pitcher Partners).
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Investor update: <a href="https://www.urban.com.au/news/28585-investor-update-charterhill-issues-clients-apology-after-closure" target="_blank">Charterhill issues clients apology after closure</a>
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Charterhill's George Nowak files for bankruptcy following liquidation of companies

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GUEST OBSERVATION
The fastest growing sector in the economy today is not mining, retailing or even education. It’s superannuation, which accounts for almost 30% more than the total savings held by the banking and mutual sector.
Self-managed superannuation is the fastest growing form of investment vehicle.
This has altered the landscape of both property and share investment. In the property market there are well-established regulations and safeguards. The stock market is a different story.
The proposed takeover of David Jones by the South African-based Woolworths and the deal made by Woolworths to buy Solomon Lew’s stake in David Jones, who happens to own an equally large share of Country Road (another takeover target of Woolworths), highlights the problem.
The board of the takeover target recommends to its shareholders what to do, but there is no formal requirement for shareholder approval. It’s assumed if the shareholders sell, that’s their approval. If they don’t sell, they don’t approve.
In the case of David Jones, a wealthy, assertive investor is getting a side deal not available to other investors.
Why should this happen?
In other countries, a formal takeover requires shareholder approval, thus discouraging side deals to occur where some walk away with large profits and others get what they can.
David Jones
The David Jones takeover provided an opportunity for some to simply profiteer, to the extent they could make more money linking this deal with others, thus cornering Woolworths to pay for deals it may not have planned.
If anything, the David Jones scenario raises questions as to whether a takeover of this nature is manipulative, unfair to ordinary shareholders and a distortion of the market mechanism.
The Australian Securities and Investments Commission (ASIC) has intervened, asking questions about the side deal protecting the interests of David Jones' shareholders by intervening in Woolworths' $2.2 billion takeover bid for David Jones.
As ASIC threatens to withhold its consent to the scheme of arrangement, a core part of the $2.2 billion takeover is arguing that a collateral benefit to one shareholder is not available to the other shareholders. The board is so keen to push the takeover that they are prepared to sell the takeover on the basis that the millions made on the side by Lew should not kill the deal.
Directors should of course be supporting the interest of the company as a whole and of all the shareholders. In the past the <a href="https://www.theguardian.com/business/2006/dec/14/australia.theairlineindustry">Allco Finance Group takeover of Qantas</a> had the same set of facts. A takeover favouring those few in particular linked to the board is a further reason for ASIC’s intervention.
ASIC is not about increasing share prices - it’s about access to a fair price. If one shareholder gets a huge side bonus which increases the prices, should those getting the crumbs be happy? Are their shares the same of those getting the bonus?
ASIC had failed in the Federal Court to force David Jones to secure an <a href="https://www.smh.com.au/business/retail/asic-steps-into-david-jones-country-road-battles-with-demand-for-independent-valuation-20140702-zstnq">independent valuation of the “collateral benefit”</a> that Woolworths was offering to one of its shareholders simply to buy his support for the David Jones scheme of arrangement. ASIC can always withhold a letter of consent for the scheme, on the grounds that all David Jones shareholders are not being treated equally.
In response, David Jones has provided shareholders with additional information to help show shareholders how this deal was done.
All this could be resolved if shareholders were given the complete, true facts in an accessible manner, and if takeover predators were forced to make the same offer to all and let shareholders decide.
Why the loophole exists
Law reform in the area of takeovers is well overdue and belongs to another age. Unlisted companies don’t require shareholder approval for takeovers on the presumption that shareholders don’t have enough information. The idea is public information and scrutiny aren’t as readily available as for listed companies.
This thought process belongs to a pre-internet era and is not very relevant today. The rule has been kept as it tends to favour larger investors who play the game of takeover and sales. Allowing other smaller shareholders more power would complicate the game, which explains why governments have kept their distance from changing these laws.
The world has moved on, and it’s only a matter of time before the predators and profiteers further manipulate the hordes of superannuation investors in the market to extract extraordinary profits.
It’s time for a closer look at shareholders' rights, together with the regulation of the market place, to discourage two-tier takeover offers - one for the well-connected and aggressive market operators and another for the other shareholders.
Michael Peters is lecturer at <a href="https://www.asb.unsw.edu.au/Pages/default.aspx" target="_blank" style="line-height: 1.3em;">Australian School of Business</a>.
This article was originally published on <a href="https://theconversation.com">The Conversation</a>.
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To protect SMSF investors the stock market needs the same safeguards property has

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Three Charterhill entities owe creditors a combined $11.5 million, according to the latest presentation of accounts.
The Adelaide-based group offered a range of services including SMSF advice, mortgage broking, real estate marketing, property management along with contract negotiation.
Charterhill Group entered insolvency in January, with many clients now caught in the wreckage of chartered accountant George Nowak’s empire.
Some related Charterhill entities are among the unsecured creditors, with about 110 clients having been caught up in the collapse having paid deposits for property purchases, previous reports suggested.
The three of the Charterhill companies have collected just the $25,000 in payments, according to their six-month presentation of accounts, The Advisor said.
The companies are under the control of the receiver, Michael Basedow of Pitcher Partners or under the control of the liquidator, Andrew Heard of Heard Phillips. 
The Charterhill Group operated as a “one-stop shop”, providing advice to clients on the establishment of self-managed superannuation funds, rollover of existing super funds into an SMSF, sourcing and purchase of investment properties, property management, insurance and taxation.
It companies included, Nova Real Estate — in administration; Lending Solutions International — in liquidation; EJ Property Developments (EJPD) (formerly known as Charterhill Group and Bentley Capital) — in receivership and Financial Wellness (trading as EZ Residential) — in receivership.
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Charterhill owes $11.5 million to creditors

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Westpac has called for the introduction of additional regulatory requirements before any SMSF can be established, in its response to the Financial System Inquiry’s interim report.
The bank says "suitability" remained the most important policy consideration in light of the complexity, ongoing administration and unique risks.
Westpac propose a test requiring an adviser or accountant to be satisfied the benefits from the establishment of the SMSF clearly outweigh the risk.
Westpac suggested the current take-up of borrowing by SMSFs has been a “rational” response to the current policy and tax settings, but has encouraged the inquiry to possibly consider how appropriate caps could ensure leverage does not become a systemic risk.
It also said the current level of official data, and oversight and analysis of the systemic implications of the SMSF sector were insufficient, given the sector’s size and continuing growth rate.
“This poses important issues for the government and SMSF members, including risk of shortfalls in retirement savings due to poor management and/ or mismanagement; calls to compensate SMSF members in the event of a failure; and poor understanding of the economic and financial system implications of the sector,” Westpac stated.
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Westpac sees SMSF borrowing as rational, but seeks to avoid systemic risk prospect

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Self-managed super funds have significantly outperformed their APRA-regulated rivals in six out of the past eight years, <a href="https://www.theaustralian.com.au/business/wealth/those-who-dare-to-diy-set-the-pace-on-super/story-e6frgac6-1226956597252">reports the Australian</a>.
A report from National Australia Bank shows that on average SMSFs had beaten APRA-regulated funds by 22.5% over the period, after paying all costs.
The numbers indicate a $500,000 investment in an SMSF at the start of the 2004-05 financial year would have returned $345,571 net by the end of the 2012 financial year, compared with the average APRA-regulated fund returning $190,100 net.
Recent figures from the Australian Taxation Office show SMSFs have grown by 26.5% to reach more than 1 million members.
The SMSF Professionals’ Association of Australia (SPAA) chief executive Andrea Slattery said recently: “The number of trustees and members exceeding 1 million is an important milestone for the SMSF industry, clearly demonstrating that there is a growing number of people wanting to take direct responsibility for their retirement savings”.
David Gall, executive general manager of banking and wealth solutions at NAB, told the Australian the results showed SMSFs were not a one-hit wonder.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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SMSFs are a better bet than rival super funds: NAB

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Suggestions that young and naïve investors are rushing to set up self-managed super funds have been debunked by figures from the Australian Taxation Office.
Graeme Colley, director of technical and professional standards at SMSF Professionals' Association of Australia (SPAA), told SmartCompany that despite an increase in <a href="https://www.smartcompany.com.au/finance/superannuation/35704-younger-generation-interest-in-smsf-on-the-rise">popularity with the younger generation</a>, the latest statistics show SMSFs are still very much the heartland of the wealthy and the mature.
“From what we see, it’s still the 50 plus category,” says Colley.
The September ATO figures show the greatest proportion of SMSFs are funds of between $200,000 and $2 million. The number of funds within this range has risen from 63.9% in 2009-10, to 65.7% in 2012-13.
In contrast, funds under $150,000 have been in a decline over this four-period from 20.5% to 17.2%.
Colley says there has been unfounded media speculation young people were rushing into setting up SMSFs.
“What the industry didn’t want to see happen was people brashly going into SMSFs without seeing if it was the right option for them. But we are not seeing that from these figures,” says Colley.
Colley says while the popularity of SMSFs is certainly on the increase, there has been a “steady as she goes” approach to SMSF investment.
“It’s more of a ‘look before you leap’ situation, we don’t want a runaway freight train,” he says.
Colley believes there has recently been a considerable focus given to the education and training of SMSF managers, in the wake of <a href="https://www.smartcompany.com.au/legal/politics/44700-fofa-changes-scrapped-by-senators-as-financial-planners-plead-for-certainty" target="_blank">changes to the financial planning industry.</a>
He says the ATO statistics also put to bed the myth that SMSFs with low balances have an "unhealthy" concentration of their assets in residential property.
“That doesn’t seem to be the case. Funds with property investment seem to be in the $300,000-$400,000 plus range. It is a common sense investment, rather than people with massive mortgages.”
"The notion that SMSFs are piling into residential property with their ears pinned back is simply not supported by the ATO figures,” says Colley.
The SPAA expects another 20,000 SMSF will be created in 2015.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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SMSFs still the heartland of the mature and wealthy 

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The Federal Treasury's Murray Financial System Inquiry has recommended that self-managed superannuation funds be banned from borrowing to buy assets such as property and shares.
There is no indication the recommendation will be accepted, or how it may be implemented, but the spectre could see the current levels of SMSF property investors further elevated before any announcement in 2015 of changes or grandfathering of the current rules.
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In implementing the recommendation, Murray says funds with existing borrowings should be permitted to maintain those borrowings.
Funds disposing of assets purchased via direct borrowing would be required to extinguish the associated debt at the same time.
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Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014.
The inquiry opted against imposing a maximum cap on fund assets that can be invested in a single asset other than cash or bonds, saying it would impose additional regulation, complexity and compliance costs on the superannuation system. 
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David Murray, chairman of the Financial System Inquiry, said the panel recommended a removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
</div>
One reason for the recommendation was that it would fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle. 
“Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy and limit the risks to tax payers,” the report also said.
After borrowings within super funds have risen to $8.7 billion, the FSI noting the level of borrowing was relatively low, but could pose a risk to the financial system.
“Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system,” the report stated.
“Borrowing, even with LRBAs, magnifies the gains and losses from fluctuations in the prices of assets held in funds and increases the probability of large losses within a fund.”
The FSI recommended the government should remove section 67A of the SIS Act on a "prospective basis".
The report noted that lenders can charge higher interest rates given the higher risks associated with limited recourse lending, and often required personal guarantees from SMSF trustees.
There were 44 recommendations to the government from the inquiry, the first wide scale review of the financial system in 17 years. Treasurer Joe Hockey will respond next year.
Previous financial system inquiries, including the Campbell Report in 1981 and Wallis Report in 1997, were the catalysts for major economic reforms in Australia. The Campbell Report led to the floating of the Australian dollar and the deregulation of the financial sector.
The Wallis Inquiry led to streamlined financial services regulation, the creation of the Australian Prudential Regulation Authority (APRA), and the current form of the Australian Securities and Investments Commission (ASIC).
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SMSFs to rush further into property after borrowing ban looms following Murray Financial System Inquiry

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The unfulfilled dream of countless small business owners is to run an active business through their self-managed super fund (SMSF).
The typical driver is to pay tax at half the corporate rate or no tax once the super fund is in the pension phase.
During his 40-plus years advising SMSFs, Martin Murden has had at least one request a year from fund trustees for advice about whether they can operate a business, such as a corner shop, through a self-managed fund.
But Murden, a director of SMSF consulting and auditing with the Partners Wealth Group, says none of these trustees to his knowledge has gone ahead and operated a business through their SMSF after listening to his warnings.
While Murden says that the law does not, in theory, prohibit SMSFs from running active businesses, various superannuation and trust laws make it highly impractical.
Here are five questions that fund trustees should ask themselves before trying to setup an active business in their SMSFs:
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<li>
Will your fund still comply with the sole-purpose test if running a business? This is the biggest stumbling block to an SMSF operating an active business. Under the sole purpose test, a super fund must be maintained for the purpose of providing retirement or death benefits to members. Indeed, Stuart Jones, author of the Australian Superannuation Handbook 2014-15, published by Thomson Reuters, writes that the Tax Office, as self-managed super regulator, “generally considers” an SMSF is breaching the sole-purpose test if conducting a business. 
</li>
<li>
Does your SMSF trust deed allow the fund to operate an active business? An SMSF may not be permitted by trust law to carry out a business unless expressly empowered under its trust deed, Jones warns. 
</li>
<li>
Can your SMSF business operate without an overdraft? Murden says the strict limits on borrowing by an SMSF will prevent the fund having an overdraft. SMSF are prohibited from borrowing except in limited circumstances. An SMSF can borrow for up to 90 days to pay a member benefit or to cover the settlement of securities such as shares and bonds. (Such loans must not exceed 10% of a fund’s assets.) 
</li>
<li>
Will your SMSF business have to pay cash for its trading stock? An SMSF is prohibited from lending to members or relatives of members, Murden stresses. 
</li>
<li>
Will your SMSF business employ members or relatives of members? While superannuation law does not prohibit a fund from employing members and relatives, their employment may encourage the Tax Office, as SMSF regulator, to take a closer look.
</li>
</ol>
Jones says the regulator may look at the “stated rationale” for employing family members and at the level of income.
In regard to salaries paid to family members, Murden points to provisions in superannuation law requiring funds to conduct their affairs on an arm’s length, commercial basis.
An inflated salary paid to a family member would also be an issue under the sole-purpose test.
As Murden says, it is common for SME owners to own their business premises through their SMSFs. Business real estate is among the few types of assets that SMSFs are permitted to acquire from their members and other related parties.
And business real estate is one of the few types of assets that funds can lease to related parties – including fund members and their businesses – without a restriction on its value.
However, running an active business through an SMSF is much harder to achieve without breaching superannuation and trust laws.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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Five questions you should ask before trying to run a business through an SMSF

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GUEST OBSERVATION
Self-managed super funds are, and have been, flavour of the month for some time now.
The opportunities SMSFs provide for people to control their retirement incomes can be attractive. Of course, running such a fund has its own costs and the person in control (the trustee) has the onus to ensure the fund performs at an acceptable level.
But there are many rules and regulations that govern SMSFs and they can be a trap for the unwary. A recent Federal Court decision shows what can go wrong.
In the case, the Federal Court imposed civil penalties of $13,000 (plus $5000 in costs) for each of three directors of the corporate trustee of an SMSF in relation to breaches of the superannuation laws involving short-term loans to a related business.
The first respondent, Early Sunshine, was the corporate trustee of the SMSF known as the George MacDonald &amp; Sons Superannuation Scheme No 2. The other three respondents are the directors of Early Sunshine Pty Ltd.
Over a four-year period from 2007 to 2011, the three directors caused the SMSF to make 71 loans to the freight trucking business George MacDonald &amp; Sons of which the respondents were employees, directors and shareholders. The freight trucking business lost its principal customer in 2001 and began to experience significant financial stress in 2007-08 amid the global financial crisis.
Typically, the loans were outstanding for only a few weeks at a time and used to cover the working capital of the business (primarily to pay salaries and wages). A total of $553,568 in loans was made by the SMSF to George MacDonald &amp; Sons.
Each of the 71 separate loans was less than $20,000 (with an average of $7,768). The loans were unsecured and did not bear interest but each loan was ultimately repaid in full. The SMSF also made a $2000 loan to a company controlled by one of the respondents. This loan was unsecured but was repaid on demand with 8.5% interest.
In August 2009, the SMSF's auditor lodged the first of several auditor contravention reports for the relevant years noting breaches of the superannuation law in relation to the loans. The reports recorded breaches of the sole purpose test, the in-house asset rules and the arm's length dealing requirement.
In October 2011, the Tax Office issued the SMSF with a notice of non-compliance. As a result, the SMSF lost its concessional tax treatment and was issued with an assessment of $63,254 for the 2008 year (which it paid in January 2012). In August 2011, the trustee resolved to wind up the SMSF and roll over the members' benefits to an industry fund.
The applicant, as Deputy Commissioner of Taxation (Superannuation), applied to the Federal Court to impose civil penalties. A statement of agreed facts indicated there was no dispute among the parties as to any aspect of the case.
While a maximum civil penalty of $220,000 could apply for each contravention under the relevant superannuation laws, the court imposed a penalty of $13,000 for each director of the trustee of the SMSF, together with $5000 (each) for the Commissioner's costs. The court agreed that the contraventions were "serious" from a regulatory perspective as they involved deliberate, repetitive breaches over a four-year period and put at risk the assets of the fund.
However, the court said it must be remembered that, in the end, the fund did not suffer any loss of capital. The foregone interest income was not significant. In addition, all of the respondents admitted all of the contraventions which were ultimately pressed by the Tax Commissioner and co-operated fully with the Commissioner both at the investigation stage and in the proceeding. Also, the fund has now been wound up and the members’ balances have now been transferred to a public fund which the court noted should ensure they are satisfactorily protected.
The court was also cognizant of the fact that each of the individual respondents had taken full responsibility for their involvement in the contraventions and had expressed remorse and contrition for their conduct.
In the case of multiple contraventions, the court said the pecuniary penalty should reflect the totality of the conduct. Although Early Sunshine was the primary contravener of the superannuation law, the court accepted there was no point imposing a civil penalty on the corporate trustee (which was now dormant). Instead, the court held that the three directors were each liable for a pecuniary penalty of $13,000.
The court initially considered that the penalties proposed by the parties were insufficient. However, after taking into account all of the circumstances, the court ultimately agreed that a penalty of $13,000 (plus $5,000 in costs) for each director was appropriate.
The court reached this conclusion after having regard to the relevant factors and applying the general principles for imposing civil penalties under the superannuation law, as set out in the established cases.
The case is a salutary reminder of the penalties that can apply when SMSFs contravene the laws that govern them. The penalties in this case were significantly lower than the statutory maximum and SMSF trustees can take a lesson from the reasons why the court considered that appropriate.
Terry Hayes is the editor-in-chief of tax news reporting at <a href="https://www.thomsonreuters.com.au/">Thomson Reuters</a>, a leading Australian provider of tax, accounting and legal information solutions.
This article first appeared on <a href="https://www.smartcompany.com.au/" target="_blank">SmartCompany</a>.
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Making loans from SMSFs – court imposes $40,000 in penalties: Terry Hayes

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Last December, the Financial Services Inquiry’s final report <a href="https://fsi.gov.au/publications/final-report/chapter-1/direct-borrowing/" target="_blank">recommended a ban on borrowing to inves</a>t in property through self-managed superannuation.<a href="https://fsi.gov.au/publications/final-report/chapter-1/direct-borrowing/"> </a>
Among its 44 recommendations the FSI report, advised government that to minimise risk to the financial system it should stop self-managed superannuation funds (SMSFs) using limited recourse borrowing arrangements (LBRAs) to acquire property and other assets.
Superannuation rules were changed in 2007 to allow SMSFs to borrow using LBRAs. The value of the loans rose from $497 million in June 2009 to $8.7 billion in June 2014.
“Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system,” the FSI report noted.
The inquiry pointed out that while a lender only had recourse to the asset over which the LBRA was held, trustees would likely sell other fund assets to repay the debt if the asset’s value fell.
“As a result, LRBAs are generally unlikely to be effective in limiting losses on one asset from flowing through to other assets, either inside or outside the fund,” it warned.
It also raised concerns that borrowing reduced diversification and concentrated risk in superannuation funds, and allowed SMSF members to circumvent contribution caps, which restrict the amount members can add to their funds.
Self-Managed Superannuation Professionals’ Association of Australia director of technical and professional standards Graeme Colley said there was “scant evidence of abuse of LBRAs to date”.
“But [SPAA] can appreciate the FSI’s position if leverage in superannuation did grow to a level where it could be a threat to people’s retirement savings,” he added.
Separate from the review, regulators have been cracking down on unlicensed property spruikers who have been luring investors into setting up SMSFs to buy residential property, often using borrowed money.
In November, the Australian Securities and Investments Commission commenced proceedings in the Supreme Court of New South Wales against property investment promoter, Park Trent Properties Group. <a href="/expert-insights/finance/37679-asic-commences-proceedings-against-property-promoter-park-trent-properties" target="_blank">ASIC alleges</a> Park Trent advised at least 500 members of the public to establish an SMSF and then use the fund to buy investment properties that were owned or promoted by Park Trent companies.
If the FSI’s proposed ban on borrowing goes ahead, funds with existing LBRAs would not be affected, although those disposing of assets bought with an LBRA would have to extinguish the associated debt at the same time. No date was set for the proposed regulations to begin. 
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