Paul's Insights: Super crimes and misdemeanors
It’s that time of year when many Australians will think about establishing their own super fund. SMSFs can have a lot going for them, however one of the big differences between running your own fund and a professionally managed super fund, is that each member of an SMSF is also a trustee.
That means every member is responsible for the way the fund is run. And it turns out that not all SMSFs meet the mark.
A recent speech by Dana Fleming, the Tax Office’s Assistant Commissioner of Superannuation, identified some of the traps that SMSFs get caught up in.
One of the biggest pitfalls is using a SMSF to access super savings ahead of retirement. It’s what the Tax Office calls ‘illegal early release’ (IER).
Apparently, several hundred newly established SMSFs have been caught out for IER this financial year. The main reasons for dipping into nest eggs prematurely were found to be financial stress or a desire to spend retirement savings on present-day benefits like funding a holiday or buying a home.
In other cases, SMSF trustees simply knew little or nothing about setting up or running an SMSF – the result of being targeted by unscrupulous promoters.
The other area of Tax Office focus is the non-lodgement of SMSF annual returns (SARs). Amazingly, 14% of SMSFs – that’s nearly three out of 20 funds, don’t lodge returns on time.
Falling behind with paperwork is like waving a red flag to the Tax Office bull. As Fleming noted, “Non-lodgment is a strong indicator that the retirement savings of SMSF members may be at risk”. In other words, the fund could be up to something dodgy or isn’t being suitably managed.
Establishing your own super fund can be exciting. It’s an opportunity to control your retirement savings in much the same way you have control over other aspects of your financial well-being. But it brings a raft of responsibilities that cannot be delegated to your accountant, tax adviser or financial planner.
The bottom line is that as a member of a SMSF the buck stops with you. And the penalties for getting it wrong can be high, including the prospect of your fund losing its tax-friendly status.
This highlights the need to get good advice, weigh up the costs against the benefits, and seriously consider if you have the time, skills and interest to manage your retirement savings. If you can’t tick all these boxes, a professionally run fund may be a better option. And if you chose a top quality low cost fund, it will certainly be simpler, cheaper and with better performance than many SMSFs.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
As a trustee of an SMSF, you are responsible for managing the fund and ensuring it complies with all legal and regulatory requirements. This includes lodging annual returns on time and avoiding illegal early release of funds. The buck stops with you, and failing to meet these responsibilities can lead to significant penalties.
'Illegal early release' refers to accessing your super savings from an SMSF before you are legally allowed to, typically before retirement. This is a major pitfall for SMSF trustees and can result in severe penalties from the Tax Office.
Some SMSFs fail to lodge their annual returns on time due to poor management or lack of knowledge about the requirements. Non-lodgement is a red flag for the Tax Office and suggests that the fund may not be managed properly, putting retirement savings at risk.
Setting up an SMSF without proper knowledge can lead to mismanagement, illegal activities like early fund release, and failure to comply with legal obligations. This can result in penalties and the loss of the fund's tax-friendly status.
Financial stress can tempt SMSF trustees to access their super savings prematurely to cover immediate expenses, such as funding a holiday or buying a home. This is considered illegal early release and is a common trap for SMSFs.
Before establishing an SMSF, consider whether you have the time, skills, and interest to manage it. Weigh the costs against the benefits and seek good advice. If you can't meet these criteria, a professionally managed fund might be a better option.
A professionally managed super fund can be simpler, cheaper, and potentially offer better performance than many SMSFs. It also relieves you of the responsibilities and risks associated with managing your own fund.
Good advice is crucial when managing an SMSF to ensure compliance with legal requirements, avoid common pitfalls like illegal early release, and make informed decisions about your retirement savings. It helps you weigh the costs and benefits effectively.