Did you know that there are now more than 600,000 Self-Managed Superannuation Funds (SMSF) in Australia?
Plus the average fund balance is more than $1 million?
SMSFs have soared in popularity over the past decade, especially because funds can purchase certain types of property to help grow their retirement wealth position.
However, as outlined in the first part of this two-part series, SMSFs are also heavily regulated and require a higher level of taxation understanding than the more common retail and industry super funds.
In the previous blog, I outlined the first four common SMSF mistakes, which included meeting the sole purpose test, not developing an SMSF strategy, not considering insurance, and binding death nomination problems.
Now let’s take a look at the final three shall we?
5. Pension payments
Many SMSF members don’t realise that there is an allocated proportion of the fund that must be paid out annually when in pension phase.
A payment equivalent to between 4% and 10% of the members’ balance must be paid every year.
Plus, different rates will apply as the members’ ages increase.
If the minimum amount is not paid, then the SMSF will need to pay the normal superannuation tax rate and lose the benefit of zero tax in pension stage.
Any over-payments can be made as a part computation, or lump sum, but the actual means of this payment needs to meet strict compliance with the relevant Act or there can be severe financial penalties applied to the SMSF.
6. Property in SMSF
With the ability to leverage in super, many people have purchased residential property with debt in their SMSF over the past decade in particular.
However, there are a number of issues that can arise – and especially in multi-member SMSFs – when one member dies.
Typically, in a multi-member fund, the property will need to be sold for the member’s death benefits to be paid out.
The surviving dependants (who are also members in many funds) may then have difficulty in re-contributing funds into super.
At the very least, the remaining members will have the additional costs of stamp duty and purchase costs if wanting to purchase another property or they may have lost the opportunity to buy another property at all.
With professional advice, though, this problem can be overcome in most cases so that the property can be retained if one of the SMSF members dies.
7. ATO intervention
Many SMSF members don’t realise that the Australian Tax Office ( ATO) administers the SMSF landscape.
While the overall legislation is enshrined in the Superannuation Supervision Industry Act, the ATO is responsible for ensuring that SMSFs are correctly administered.
Conversely, for retail and industry funds, this responsibility falls on the Australian Prudential Regulation Authority (APRA).
The ATO is empowered to penalise both the fund and the trustees for breaches and in severe cases can deem a fund non-compliant.
That would mean that the SMSF loses its tax benefits — amongst other things — and may also be forced to close.
Don’t let that happen to your SMSF.
SMSFs have a number of opportunities to identify a breach, starting from the administration and tax preparation, to an independent audit and, of course, an ATO review.
Do not expose yourself as a trustee (or director of a corporate trustee) or the fund to a penalty from the ATO.
Instead, a regular review of the fund deed, its operations and member needs must be completed by competent advisors.
This is not a “do it yourself” task as at the very least an independent audit will be required.
At the end of the day…
When operated and administered correctly SMSFs can provide additional financial windfalls at retirement.
Sure there are more legal and taxation hoops to jump through but, with the right advice, you can be confident that you’ll ticking every box that’s legally required.
Having control of your financial future is one of the keys to investment and financial success and SMSFs can play a significant part if operating at an optimum level.