SMSFs are a growing sector of the super industry, but strict compliance is necessary or the consequences can be severe.
LAST week a record number of self-managed superannuation fund (SMSF) professionals gathered in Sydney for their annual conference to discuss the issues facing their sector. The number of people now servicing this industry - more than 1100 people were at the conference - is testament to the power the self-managed super industry now wields.
More than 99 per cent of super funds in Australia are SMSFs and as at September last year they held the largest proportion of superannuation assets (31.1 per cent).
If you have a self-managed superannuation fund, you know what I'm talking about. If you don't, that's OK, it's just the option to manage your superannuation yourself.
It obviously gives you greater freedom to invest the way you please - but be warned, with greater freedom comes much greater responsibility. And even if you're not happy with the way your mainstream fund is managing your retirement funds, do you really think you could do a better job yourself?
You can start your SMSF under a number of structures but essentially you become the trustee of the fund and the buck stops with you. Even if you act on an accountant, financial planner, lawyer, or auditor's advice, if you do something wrong it's you that could be up for tax penalties or even prosecution.
There are numerous requirements as a trustee. Aside from the documentation you need to submit and costs you will incur just to set the fund up, you will need a trust deed.
The Australian Taxation Office, which is the regulator for SMSFs, describes a trust deed as: "A legal document that sets out the rules for establishing and operating your fund - things like the fund's objectives, who can be a member and how benefits are paid."
You will also need an investment strategy, in writing, that the ATO says needs to take into account: diversification of investments, risk and likely return of investments, liquidity and, most importantly, the fund's ability to pay benefits and members' needs and circumstances. And you must get your fund audited annually and submit an annual return to the ATO by the due date. If you don't, the ATO will come after you.
You really need to lodge that return on time. Speaking at the conference, the ATO assistant commissioner Stuart Forsyth said that just about 70 per cent of funds lodge on time.
"It's a breach of the SIS [Superannuation Industry Supervision] Act not to lodge on time," he said. "Three late lodgements in a row and we can make you non-complying."
That means you will lose your preferential tax treatment and you will be up for a large tax bill. A complying SMSF is taxed at 15 per cent whereas a non-complying fund is taxed at 45 per cent.
But the ATO isn't all bad and appreciates being informed.
If you, for any reason, think you will not be able to lodge on time, contact the ATO at email@example.com. Not all funds with contraventions are made non-complying. Last financial year Forsyth said that only 85 funds in total were made non-complying despite there "clearly being thousands of funds with contraventions".
One recent court case highlights the importance of knowing your rights and responsibilities as a member of an SMSF and clearly understanding the structure of your fund.
In the case of Shail Superannuation Fund the ATO deemed that the wife was liable for the fund's total tax bill - that was millions of dollars - after it was declared non-complying when her estranged husband absconded overseas with most of the fund's assets.
The Administrative Appeals Tribunal upheld the decision.
There are some very expensive traps you can fall into with SMSFs so make sure you are aware of all your responsibilities before you get involved and if you already have one, don't get lazy when it comes to all your reporting requirements. You may very well be asked to present them all to the ATO one day.
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