Tax with Max: Keeping up with paperwork in account-based pensions

Appointing a corporate trustee for your SMSF may be necessary.

Summary: This article provides answers to questions about why family SMSFs should consider a corporate trustee; how best two manage two pension funds without drowning in paperwork; how for SMSFs to invest directly in shares and when to use SAMs; why cloud computing is a boon to accountants and their clients and the tax deductibility of SMSF expenses.

Key take-out: The requirements for family SMSFs can change when minors turn 18 and best ways to simplify multiple pension accounts.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation

Why a corporate trustee is the best option for some family SMSFs.

Q. I manage three family SMSFs. Each of these funds have been operating for over 10 years. Two of the funds started with two minors each as members. One of the four minors turned 18 about 12 months ago and after discussions with the auditor of the fund the minor was noted as a trustee on the Trustees Declaration for 2012. Now the other minor in the same fund will turn 18 in the next 12 months. Discussions with the ASX and my broker reveal that four names cannot appear on the CHESS account.

The auditor who completed the audits on the three funds since start date has decided to retire and is not available for 2013. A new auditor advised me that all of the assets must be in the name of all trustees and he considers the fund to be non-compliant and the only solution was to have a corporate trustee. At this time I do not consider a corporate trustee to be appropriate. Do you consider the fund to be non-compliant?

A. Whether I consider the fund to by compliant does not really matter, the auditor of the fund is the final authority on this. I do however think that the auditor is taking a very narrow view on this.

There are some circumstances when not all of the trustees’ names can appear as being owners, such as you have found out about having four names shown on a chess account. In addition in some cases the name of the fund cannot appear such as in the case with the title of a property owned by an SMSF.  

Having a corporate trustee is definitely your best option. You could also look at rolling over the super for your sons to an industry fund so the SMSF and only have you and your wife as members. Another option is to shop around for another auditor that does not take such a hard line.

Ways to keep the paperwork under control when paying a pension.

Q. I have two account based-pensions in my SMSF and re-contribute each year to build up one with a high tax-free component.  I want to keep the documentation costs of this to a minimum.  Do I need to have a new pension Product Disclosure Statement and pension agreement each year, and exactly what is the minimum paperwork required?

A. As the members of an SMSF are also the trustees, and therefore are aware of the risks and other facts that would normally be disclosed in a PDS, there has never been the requirement for an SMSF to issue a PDS to members when taking out a pension. Some service providers to SMSFs do include this is a part of the documentation and also prepare a pension agreement deed. Unless the trust deed of an SMSF specifically requires this documentation to be prepared it is unnecessary.

From what you describe it sounds like you have one pension with a high percentage of taxable benefits, and another pension with a high percentage of tax free benefits. If you are ceasing the taxable benefits pension once a year to withdraw a lump sum, and then contributing this lump sum as a non-concessional contribution to the account with the tax free benefits, this would require both pensions to cease and re-commence each year.

Unless the trust deed of your SMSF dictates otherwise, the documentation needed would consist of a series of letters from you ceasing the pension made up of the taxable benefits; then requesting a lump sum withdrawal from the taxable benefits in the accumulation account. The documentation would also request a new pension commence from the balance of the taxable benefits account; cease the pension made up of tax free benefits; advise the fund of the non-concessional contribution; and finally request to start a new pension from the tax-free benefits. In addition to this series of letters, there would need to be trustees’ minutes or resolutions supporting all of the actions that have been undertaken.

If you are under 65 there is another way to achieve your desired result. This would be done by withdrawing $600,000 from the taxable pension account and recommencing a pension. You would then cease the tax-free pension; contribute $150,000 before June 30 and $450,000 after July 1 as non-concessional contributions; and then commence a new pension from the tax-free benefits account.

Before taking any action you should seek professional advice.

What are best ways to invest directly in shares through our SMSF?

Q. We would like to invest through our SMSF in Australian shares and/or emerging markets, what are our options? Do we have to use a share broker? Do you or a Eureka team member offer financial planning on a fee-for-service basis? Also what can you tell me about SMAs, where do we find them, how do we rate them, how do we access them?

A. You can invest in Australian shares either directly or through managed funds. It is also possible to invest in overseas emerging stockmarkets directly but this is more commonly done using managed funds. If you are investing directly it makes sense to use a low-cost online broker service. I am a fee-for-service advisor and favour an approach where SMSFs invest in a mixture of direct shares, managed investment funds, and index funds.

Separately Managed Accounts are another form of managed investment fund. Where they differ from traditional managed funds is that the investor holds the title to the investments rather than the fund manager as happens in a traditional fund. Some providers of SMAs allow the investor to change the fund manager when they are not happy with their performance. Because the investor owns the shares there is no capital gains tax event when the fund manager is altered. There are other advantages and some disadvantages relating to SMAs. Before investing in these you should seek professional advice.

Cloud computing can minimise human accounting errors.

Q. What please is Cloud Computing that Motley Fool is banging on about?

A. Cloud computing is another term for computing via the Internet. One of the best ways I can illustrate how this works is by relating it to the computer accounting software used by accountants for processing SMSFs.

Traditional accounting software has been loaded onto an accountant’s computer and then all of the financial transaction and other information are manually inputted into the system. Cloud computing accounting software is accessed via the Internet or cloud and resides on the computer server of the service provider. The more efficient cloud-based accounting software providers receive information in electronic form directly from financial institutions thus reducing the chances of error and also the amount of work that comes from the manual input of information.

Are expenses incurred running an SMSF tax-deductible?

Q. I am 58-years old and living off investments outside super and managing my SMSF which is still in accumulation stage. Can I deduct my personal costs in running the fund such as travel, accommodation and subscriptions to investing groups and seminars from the SMSF under SMSF rules? Are these deductible from the tax on super and what records would I need to keep?

A. Trustees of an SMSF cannot be paid for the work they do unless it is in a professional capacity such as an accountant. Trustees can however be reimbursed for costs related to the discharge of their duties. Whenever there is a doubt as to what trustees can do in relation to an SMSF they should first read the trust deed.

If the trust deed is silent on what they can and cannot do, such what reasonable expenses they can be reimbursed for, the trustees need to check with the auditor of their fund. The auditor will be able to confirm what they believe will be reasonable expenses to be reimbursed and what records need to be kept. Any expenses related to the investing activities of the fund should be tax deductible.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au