The continued solid growth in self managed superannuation funds (SMSFs) indicates that plenty of Australians consider themselves at least as capable of successfully managing their retirement savings investments as the professionals (or perhaps more so).
With returns from the bigger retail super funds not always impressive, the surge towards SMSFs is not expected to diminish.
But some in the industry are concerned that the growth in SMSF numbers may come with reservations that not every trustee/member will have equal capacity to deal with all the requirements and responsibilities that come with running one’s own super fund.
Shirley Schaefer, recognised as one of Australia’s leading SMSF specialists, says that super is again a hot topic, with the government making more announcements and changes that many view as being more than can reasonably be kept up with.
“This constant state of change means that it can be difficult to know where you stand with your super, and SMSFs in particular,” Schaefer says. “On top of this, everyone you talk to seems to have an opinion or know how super should be dealt with or what the rules are.”
While an SMSF can be a very powerful retirement savings vehicle if run correctly, and good for long-term wealth accumulation and asset protection within a tax-effective structure, there is plenty of scope to lose your footing over some of the basic (and admittedly numerous) compliance tasks.
“Do you really know how much you can put into super each year, or how you can take money out of super?” Schaefer says. “Do you know what investments can be made by an SMSF or what obligations you have as trustees of a SMSF?”
A new webinar, Top 10 SMSF Questions,
is scheduled for November 16.
Presented by Shirley Schaefer,
the webinar will “demystify”
some of the rhetoric that is
flying around the super space.
Click here for more details.
If mishandled, the potential pitfalls can easily outweigh the perceived benefits of running your own SMSF. So what are some of the potential pitfalls trustees should keep a weather eye on?
Tripping up on the contributions cap
One of the more common inadvertent mistakes that SMSF professionals say is the likeliest problem a trustee will face is exceeding the annual concessional contributions cap. Of course this can affect everyone in superannuation, but an added complication for SMSFs is that many, if not most, funds will have their administration tasks completed annually, and in arrears.
Hence, members may not find out that a contribution took the fund over the contributions cap until the accountant does the books for the fund, which could be months after the end of the relevant financial year.
Another SMSF pitfall to watch for is investing in property incorrectly. One way this can happen is where an investor is aware of an investment property and puts a deposit on it, and then sets up an SMSF with the aim of owning that property through the fund. But in these circumstances, it will not be the SMSF that has bought the real estate but a private person.
And once the SMSF is established, it is not allowed to transfer non-commercial property to the fund. (Although remember an SMSF is permitted to hold “business real property” – the business proprietor’s operating premises – in the fund.)
Tangles on pension tax, and exceeding limits
Ordinary income and statutory income that a complying SMSF earns from assets held to provide for super income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI), and the ATO reports that this is an area that has caused a lot of headaches for SMSFs claiming tax deductions in the past.
It says calculation errors are most at fault, but also that SMSFs mistakenly include items such as investment expenses and management and administration expenses in with ECPI. The ATO says that funds may need an actuarial certificate to determine the correct amount of exempt income they can claim.
It is important to make sure that:
- all assets are re-valued to current market value before starting to pay a pension
- if the fund has income tax losses, not capital losses, the loss amount is reduced by the net ECPI amount. Any remaining tax losses can be offset against the SMSF’s assessable income
- all income earned during the financial year in the SMSF annual return, even if the fund is in 100% pension phase, is reported
- funds don’t claim a deduction for expenses relating to pension assets as the income is non-assessable
- if the fund has both assessable and non-assessable income, the expenses should be apportioned.
Also on the subject of pension payments, another item on the list of inadvertent mistakes is not meeting pension limits when the SMSF is in pension mode (minimum and maximum drawdowns) – either not meeting the minimum pension, or exceeding the maximum.
Investment reporting and personal use of assets
As well as incorrect deductions being claimed for investment expenses, another often seen mistake that the ATO reports is capital gains from a fund’s investments being incorrectly classified and reported as “other income”.
Payments from the fund ostensibly made as investments have sometimes proven to be outside the scope of the regulations – such as a loan to a relative to launch a business idea, or who might be in financial trouble.
In a similar vein is paying expenses out of the fund that are not really fund expenses. This can be as simple as using the wrong chequebook, or of course being unaware of the strict rules that apply. But these breaches put an SMSF is danger of having penalties apply or being deemed non-compliant.
Running out of steam
SMSF service providers say that another potential pitfall is loss of interest – quite simply, the novelty of running your own fund can wear off. A not un-common route to this situation can start with business owners realising the benefits open to them through owning their business premises through an SMSF.
However after going through all the right steps and buying the premises, the fact remains that the reason for setting up the fund may not be the right reason, but the owners now find they have another task at hand and the whole compliance headache.
Another potential outcome can result from SMSF members losing their spark just by getting older. When many people are well into retirement, they can simply become less capable of managing their financial affairs, which can have a detrimental effect on the super fund.
In a similar vein, sometimes one of the members of a fund is very engaged, and perhaps were the driving force in setting up the SMSF, which turns into a hobby and gives them a purposeful pursuit in retirement. But they may have a spouse who is more of a passive member. If the active spouse dies, the passive spouse can get thrust into the driver’s seat without any preparedness.
A way around this potential problem is to have a clear succession plan, or at least an idea of ceding control of the fund in some way. Perhaps this could involve bringing in a child, or winding up the SMSF, but these choices very much depend on individual situations.
All of the above situations are of course a reminder of the “5 Ds” that Shirley Schaefer touched upon in a previous webinar (the recording of this webinar is still available). And there are also the infamous SMSF horror stories that can serve as warnings for every trustee (there is also a recording of a webinar on this topic still available).
A new webinar, Top 10 SMSF Questions, is scheduled for November 16. Presented by Shirley Schaefer, the webinar will “demystify” some of the rhetoric that is flying around the super space.