Don’t believe anyone who says being trustee of a self-managed super fund is simple or easy, and is not a set-and-forget option for growing your retirement savings.
If run properly, the rewards of SMSF can be outstanding with lower fees and superior investment outcomes when compared with many “off the shelf” super products.
The danger is you won’t have the time or expertise to do the job properly. YMM asked leading SMSF experts to identify the top stumbling blocks to DIY super success and offer some solutions.
1. Have you got the right trust structure?
SMSFs can have a corporate trustee structure or can be put together so each fund member is an individual trustee. The majority of funds use the individual structure. This means each member (between one and four people) is named in the trust deed and all the assets owned by the fund are registered in the name of each member.
The individual trustee structure is the cheapest and easiest to set up but it can cause problems down the track. If one member dies or leaves the fund, or another member joins the fund, all the assets have to be re-registered.
A corporate structure means a separate company is set up to be the trustee and all fund members must be directors of that company. With a corporate trustee the ownership of investments doesn’t have to be changed if fund membership changes because all investments are held in the name of the trustee company.
Corporate trustees also enjoy succession benefits. For example, individual trustees must be replaced if they leave the SMSF. So if Mr and Mrs Smith are in a fund together and Mr Smith passes on, if the individual trustee structure is in place, Mrs Smith must appoint a replacement trustee. If the couple had chosen a corporate structure, running the fund with Smith Enterprises as the corporate trustee, Mrs Smith could have acted as sole director.
Funds that currently have individual trustees can be changed to a corporate structure if each member agrees. To use the corporate trustee structure you will have to establish a trustee company as well as establish the actual SMSF. The company has to be established solely for the purpose of managing the super fund.
- If you already have a fund, check the trust deed to find out what documentation and consent requirements are needed to change to a corporate trustee
- Set up a new company or use an existing company provided each director of the company is a member of the super fund
- Appoint directors: they must consent to their appointment in writing and, within 21 days, sign a trustee declaration stating they understand their responsibilities
- Notify the ATO within 28 days of the change
- Change asset ownership by notifying relevant share registries and banks of the new ownership structure
Have you taken care of estate planning?
This can be a sticky issue if you are in a DIY fund with other family members. Surviving fund members, relatives and their partners may all have good intentions, but money has been known to cause problems when a family member dies. Blended families, with children from consecutive marriages, can also pose issues.
On the other hand, if set up properly, an SMSF is a powerful estate-planning tool, potentially more powerful than a will as it can be difficult to attack legally.
SMSFs are regarded as separate to a Will in the eyes of the law. Trustees have been known to assume that their fund will become part of their estate, to be distributed amongst their chosen recipients, but this is not the case. Unless specified otherwise, surviving fund members or dependents will take control of the assets.
Each SMSF member can make a binding death benefit nomination, which directs the trustee to pay the member’s superannuation benefits as nominated. These must be made in writing, in the presence of two witnesses aged over 18, who are not beneficiaries of the nomination.
Look very carefully at how the law applies to your particular SMSF deed when making the nomination, as it may otherwise be challenged down the track. A binding death benefit nomination within an SMSF can offer greater freedom than the beneficiary arrangements allowed in other types of super.
3. Is the advice you’re getting expert and reliable?
The complex nature of SMSFs means it is important that trustees seek quality financial advice. The big issue is that advisers are not required to hold any specific level of expertise in SMSFs. This opens up the possibility that they will suggest investing in something that enhances their own interests, rather than those of the trustee.
For instance, many SMSF trustees are currently being advised to borrow money to invest in real estate. The problem is that advice is coming from real estate agents and property developers with a vested interest in making the sale. Think carefully if you’re being advised by a real estate agent or property developer
Many SMSF trustees are retirees who have plenty of time and investment experience to apply to the day-to-day running of their fund. Some also have a background in finance or accounting so they have the “in house” expertise to run the show but what if you don’t?
If you don’t have the time, experience or expertise to be truly DIY with your super then perhaps an SMSF is not the best option for you. There are many low-cost super funds currently available offering competitive fees that require a much smaller time commitment.
If you’re determined to run an SMSF, the best way to ensure you get truly expert advice is to contact SPAA (the SMSF industry association) for a list of accredited advisers who specialise in SMSFs.
Talk to three or four recommended professionals before making a choice and ask for clear documentation about fees, charges and any relationships that may be commission or incentive-based.
Are you making the best investment decisions?
Investment choices can make or break a SMSF. The two biggest mistakes trustees make are breaking the ‘sole purpose’ test and having too many in-house assets. The sole purpose test requires everything an SMSF does to be for the purpose of saving for retirement. An SMSF is not like a bank account with money you can use when you need to. Doing so will quickly put you on the wrong side of the tax office.
The other critical rule is that no more than 5% of the value of an SMSF’s investments can be for personal use. For instance, your SMSF can’t purchase an investment property that is used as a family holiday house.
Art and collectables are particularly under the ATO’s spotlight. The value of such investments is largely contained in their display, but this is not allowed when they are SMSF assets. Paintings, antiques and so on can no longer be stored or displayed at personal properties. They can be held in places of work but can’t be displayed. To what lengths this will be policed is uncertain.
Borrowing regulations are also strict and updated fairly regularly. You’ll need to establish a separate trust for the loan and the conditions can be onerous.
SMSF experts strongly urge trustees to maintain separate accounts and avoid purchasing assets for personal use. Make sure everything your SMSF does is for the sole purpose of generating retirement savings.
Professionals recommend having enough investment diversity to cover for the possibility of periods when returns are low. Aim for a mix of assets across different markets to ensure the fund is liquid and can still continue to grow your retirement savings through specific market downturns.
5. Have you gone over your contribution caps?
The ATO is strict and can be unforgiving when it comes to contribution caps. They are the limits to the amount of money you can put into a super fund in any one year. The two general types of contribution are:
- Concessional – contributions that are subject to tax, such as a contribution from an employer, salary sacrifice, or a deduction by a self-employed person. The limits for these are $25,000 a year for people aged under 50 and $50,000 a year for over 50s.
- Non-concessional -- contributions made after tax come from a member’s own pocket or bank account. The limits for these are $150,000 a year or $450,000 over three years (can bring two years forward with a lump sum) for under 65s, while those aged 65-75 can contribute $150,000 a year, but not bring sums forward and over 75s can no longer make non-concessional contributions.
Professionals say that the end of the financial year is when many trustees run into difficulties. If they discover they have contributed too much and it is already June it is too late to adjust any further contributions to come in under the cap for the financial year.
If you do over-contribute the excess will be taxed at 46.5%. Professionals agree the penalties seem large for such a small mistake but the ATO rarely revokes penalties. In the most extreme case, a breach of both concessional and non-concessional caps in the one year could see a member slapped with a 93% tax penalty.
From July 2011, members will be able to breach contributions by up to $10,000 without penalty. This is not much help to those who have already been penalised. The perfect example was the case of a 76-year-old man who went to withdraw $100,000 from his account online, but accidentally hit a button that contributed the money back into the super account instead of his own. Despite this being an honest mistake, it cost him $46,500.
The unforgiving nature of the law in this area means that the best path for members is preventative. People need to realise how easy it can be to make a breach and be careful to stay on top of every single money movement that may result in a SMSF contribution.
Tip: Check with payroll to find out when your employer actually pays super contributions. Sometimes payment is delayed, despite being detailed on a current pay slip. The difference can be crucial, especially near the end of June.
Get reading if you’re serious about running a DIY super fund. The ATO website has extensive information covering all trustees need to know to stay on top of legal obligations and offers a quarterly newsletter. The Association of Superannuation Funds Australia offers courses, such as a diploma in superannuation management. SPAA offers numerous courses through its National Training Register for Trustee Education.