Australia currently boasts around 435,000 Self Managed Super Funds. Martin Murden provides tips on three areas key to keeping your SMSF in good order.
1. How old are your trustees?
According to Australian Taxation Office (ATO) statistics, around half of Self Managed Super Fund (SMSF) members are currently over the age of 55, and almost 18 per cent are over 64. Since all the members of an SMSF must be trustees (and vice-versa), this means more than half of Australia’s SMSF trustees will, in the next five to 10 years, enter that period of their lives when they become increasingly susceptible to heart attacks, strokes and other health conditions associated with growing older.
Too many of us think we’re in great shape and unlikely to be a candidate for a serious illness. Unfortunately, these things have a nasty habit of sneaking up on us, so my advice to trustees is: plan ahead and be prepared.
Too often only one member of an SMSF truly understands the workings of the fund and makes all the decisions. What this means is that, should this key person become incapacitated, the remaining members may not be in a position to keep up with what is important – that tax returns are lodged, that the fund complies with legislation and that there are regular meetings with accountants and investment advisors.
Further, besides struggling to keep up with the activities necessary for keeping the SMSF compliant with legislation, those taking over the reins may lack the business acumen to take full advantage of investment opportunities, missing out on further building up the value of the fund.
So what can you do to avoid leaving your ageing spouse or partner in charge of a fund they have little or no understanding of – and possibly leaving your children unnecessarily exposed to tax problems should both of you die suddenly?
The options available include:
• roll over to a public offer or industry fund
• appoint a professional corporate trustee for your SMSF
• appoint a power of attorney (POA) for your fund
• include your children in your fund.
2. Don’t forget those pension payments
There has been a noticeable increase in the numbers of SMSFs not paying pensions to members, or not paying them when they’re due. My suspicion is that many trustees contravening this legislative requirement are unaware that they’ve failed to make the necessary minimum payments and only discover this when their financial year-end
accounts are being prepared.
Unfortunately, it is then too late to take the necessary corrective action – to comply with SMSF legislation, the minimum pensions must be paid in the year they are due. Funds which have failed to make such payments may be deemed not to be eligible for a tax exemption on any income earned by the fund, which for some could mean a large tax bill.
To help avoid this situation, trustees and members need to familiarise themselves properly with their duties and obligations regarding superannuation income streams. This should be done at the time members’ pensions commence.
What are the rules?
According to SMSF rules, once a fund member reaches preservation age (currently 55) and begins drawing a superannuation income stream pension, it is crucial that the minimum pension be paid each year. The minimum pension starts at three per cent of a member’s account balance for those aged 55–64 years and increases after 64.
In the 2012-13 financial year the minimum pension withdrawal will revert to pre GFC rates of four per cent for those aged 55-64.
The following example shows how neglecting to pay the minimum pension in time can impact on a member’s tax bill. The ATO understands there are factors beyond trustee or member control that can prevent them from meeting the normal pension requirements. However, ignorance and/or forgetting to pay a pension do not fall into this category.
3. Other breaches to avoid
In the 2009-10 financial year, 185 funds were deemed non-compliant. The key transgressions were:
• making personal loans to members
• exceeding in-house asset rules
• borrowings in breach of SMSF rules
• not all trustees being members and members, trustees.
Of these, making personal loans to members was by far the most common breach. The majority of these loans were not large. However, although often small in dollar terms, and small when compared with overall fund assets, personal loans are simply not allowed under super legislation – they’re an absolute no–no.
It is important to bear in mind that any breach of legislation by SMSF trustees can attract penalties. The ultimate penalty would be to have a fund declared non-compliant, which would result in its taxation rate increasing from 15 per cent to 46.5 per cent. Further, an individual could be disqualified from the role of SMSF trustee.
As far as the ATO is concerned, super funds receive very attractive tax concessions, and if they want to retain these benefits, they need to toe the line. If you’re uncertain about whether or not your actions as an SMSF trustee would result in your fund being in breach of superannuation rules and regulations, seek appropriate expert advice before you make a move.
For information on running an SMSF, including understanding compliance and penalties, see the Australian Taxation Office website at //www.ato.gov.au.