Attacks on SMSFs and their trustees are continuing unabated. The negativity has switched from people in the funds management industry with a vested interest to a foreign expert.
Despite most of the attacks being unwarranted, trustees of SMSFs should be aware of simple mistakes they should avoid to ensure they do not come to the unwanted attention of the ATO.
In the past few weeks Robert Holzmann, a European financial literary specialist, stated that a competency test should be introduced for SMSF trustees. Holzmann demonstrated his lack of knowledge of SMSFs, because trustees sit an exam every time the accounts for their fund are prepared and audited. In fact, in the first 15 months of the operation of an SMSF, all breaches of the rules must be reported via an Auditor Contravention Report to the ATO.
When the facts are examined a very different picture emerges about the competency of SMSF trustees. In the five years from June 30, 2004, to June 30, 2009, only 2 per cent of all SMSFs were the subject of ACRs. If there was going to be any tests introduced, given recent publicity of breaches of various rules and laws by politicians, it should be an ethics and morals test for all federal and state MPs.
Despite the overwhelming majority of SMSF trustees discharging their duties correctly, there are some administrative errors that trustees should avoid. The first type are relatively minor and do not result in major consequences for the trustees of an SMSF. The second, depending on the age of the SMSF members, can have more disastrous consequences.
The first type of error comes from trustees not segregating their personal financial activities from the financial activities of their SMSF. In most cases these include income from investments being banked into incorrect bank accounts. These mistakes often occur when the members as individuals are the trustees of the SMSF.
The most common example of these errors is when either SMSF income is incorrectly banked into a private bank account, or private income is incorrectly banked into an SMSF bank account. If these mistakes are repeated often enough it can result in the ATO requiring trustees to undertake a compulsory SMSF education course. The best way of ensuring that these types of mistakes are avoided is to have a company act as trustee for the SMSF.
The other error, which can result in more serious consequences, is when SMSF trustees pay expenses on behalf of their fund. These expenses can include accounting fees and sometimes income tax and fees payable by the fund.
There is some confusion as to how payments made by trustees on behalf of an SMSF should be treated. The ATO has stated that these payments should be treated as contributions by the members, while some accountants and auditors believe they should be treated as a debt that must be repaid by the SMSF.
The problem that can arise for SMSF trustees, if the ATO's treatment is required, is that this can lead to an excess contributions problem. This occurs when the members have contributed up to the maximum limit in the year they pay the SMSF expenses.
Of even more concern is when the members are 65 or older, and do not pass the work test, it can lead to a breach of the contribution rules as the members are unable to contribute to superannuation in this situation.
■The proposed start date for the change in the treatment of account-based pensions by Centrelink is January 1, 2015 - not 2014 as reported in last week's article. This means superannuation members have just over 12 months to start an account-based pension and be covered.
Max Newnham is the founder of smsfsurvivalcentre.com.au