Outsource advantage

Do I need to do that?

For many self-managed fund trustees, the obligations involved in running your own fund don't seem that onerous. And after all, it's only your money (and maybe that of a couple of close family members) that we're talking about. But the head of strategic advice at Perpetual Private Wealth, Chris Balalovski, says a recent court case might lead you to think twice.

The case, Shail Superannuation Fund v Commissioner of Taxation, involved a $3.5 million super fund operated by a husband and wife. It was set up when the couple were happily married and successful in their careers but after the relationship broke down, the husband illegally withdrew the majority of the fund balance and left the country. The Tax Office deemed the fund non-complying due to the illegal withdrawal, which meant its tax liability amounted to close to half the fund's assets at the start of that year. As the sole remaining trustee, Mrs Shail was held liable and now owes the Tax Office almost $3 million in tax, penalties, and interest.

In finding for the Tax Commissioner, the court held that as a trustee of the fund, Mrs Shail had allowed the illegal withdrawal to occur, Balalovski says.

She had a fiduciary responsibility to make sure such a contravention could not happen.

He says while this is an extreme case, there have been similar instances where trustees have run into problems and the risks increase where younger and less-stable family members are brought into the fund.

So what can I do to protect myself? Balalovski says it is important to realise you have a different "hat" on when you become a trustee. You have a fiduciary obligation to ensure the fund meets its legal requirements. So even if you trust your partner and co-trustee implicitly, you are required to protect the fund's assets. He says even a simple thing like requiring both trustees to be signatories may have helped in the Shail case.

While it will involve extra costs, outsourcing the running of the fund can offer protection.

How does that work? Balalovski says there are several options and what's best will depend on your circumstances and how much control you want over your super. At one end of the scale is a public-offer super fund which does everything for you, though still allowing you to choose between a number of investment options. But that's forgoing do-it-yourself altogether.

He says a superannuation wrap account will usually offer more flexibility and investment choice, though you're still getting out of do-it-yourself territory.

Another alternative is to convert to or set up a small Australian Prudential Regulation Authority (APRA) fund where you still have your own fund but it has an external registered trustee and is regulated by APRA rather than the Tax Office. Balalovski says the trustee is usually a commercial trustee company and it takes on all the fiduciary duties involved in running the fund and complying with the law. You can decide where and how your money is invested, though he says most trustees will stipulate a range of assets that can be used and may exclude things such as overseas property, gearing into property, and more exotic investments such as art. What is and isn't allowed will depend on the company concerned.

Won't that cost more? Balalovski says fees are usually charged on a sliding scale according to the the value of your assets. For a fund of about $500,000 to $1 million, 2 per cent or 3 per cent is a ballpark figure. This should include costs such as the fund's audit and tax return. In exchange, the trustee takes over paperwork and legal requirements.

If you already have a self-managed fund, he says you can convert to a small APRA fund without disposing of your existing assets (provided the new trustee will accept them) or incurring capital-gains tax.

Would setting up my own corporate trustee be better? Balalovski says having a corporate trustee for your self-managed fund offers some protection, but as a director you may still be held personally liable for transgressions if negligence was involved.

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