Avoiding the pitfalls of managing your own SMSF
by Graham Lalor, Taxation Accountant
Self Managed Superannuation Funds (SMSF) have many benefits, such as:
- Being able to purchase direct property through SMSF
- Great choice of investments
- Flexibility of being in control
- Low fees for high account balances
However, investors operating a SMSF need to ensure they comply with many regulations that govern them. Failure to comply can incur penalties and interest charges from the Australian Taxation Office (ATO).
You can choose whether you want to manage your SMSF yourself, i.e. DIY superannuation fund, or have it professionally managed for an annual fee.
Managing it yourself may save you a couple of thousand dollars per year, but with the many complicated rules surrounding superannuation funds, and the ongoing changes to the rules each year, it could be money well spent to invest in a professional administration company to do this for you & avoid the common mistakes many owners of DIY funds make, such as these:
1. Non Entitlement to Lump Sum Withdrawal of Benefits
Since 1 July 2007, retirees have been able to access their superannuation tax free after they turn 60. However, restrictions on the access to these benefits still exist. A person who is over 55 and is still working can start a transition to retirement pension, however they cannot withdraw lump sum amounts from their superannuation fund. From 1 July 2007, a pensioner can only take up to 10 per cent of their superannuation account balance via a superannuation income stream in any one year.
If a fund member has withdrawn a lump sum amount while they are under 65, and they are on a transition to retirement pension, this mistake must be corrected by paying the money back into the fund. The fund treats this payment as a loan and so the member must also pay the fund interest at a commercial rate.
2. Ignoring the Work Test
Members sometimes get confused between the contribution limits introduced in July 2007 and other contribution rules that apply to members who are about to turn 65.
Some people make superannuation contributions just before turning 65, based on a rule that says if a person makes a contribution in the financial year during which they turn 65, they can contribute up to $450,000 in after tax contributions. The contribution limit decreases to $150,000 after a person turns 65.
However, another rule states that if the person defers making such a contribution until they have passed their 65th birthday, and rely on the financial year rule, they need to be working before they can contribute in this manner.
If a person is over 65, they have to pass the work test in order to make any contribution. The work test requires a person to have worked for at least 40 hours in a period of no more than 30 consecutive days in the year, before the contribution is made.
If the rule is breached, the superannuation fund must refund the contribution to the member as soon as it is aware of the mistake. Generally, this should occur within 30 days of the member becoming made aware of the mistake.
If corrected, the regulator will normally warn the trustees not to breach the rule again.
3. Excess Contributions
As a result of the introduction of contribution limits from 1 July 2007, and the later halving of these limits from 1 July 2008, has meant many superannuation fund members have made excessive contributions, either deliberately or accidentally. The problem can only be resolved by paying the penalty tax on the excess contributions.
When funds contribute superannuation in excess of the $25,000 and $50,000 concessional contribution limits, the excess contribution is taxed at an additional 31.5 per cent. Any amounts over the non concessional contribution limit of $150,000 will be taxed at the penalty rate of 46.5 per cent.
4. Failing to Pay the Minimum Pension
The superannuation fund rules are breached if the fund does not pay the minimum required aged base pension each year. For example, if a member is drawing a transition to retirement pension and the member is under 65, the minimum annual income stream payments must be 4 per cent of the account balance at the start of the financial year.
If a pension has been paid under the minimum required percentage amount, the way to resolve the problem is to treat the under paid pension as a liability that must be paid in the following years.
5. Excess In–House assets
An in-house asset is a superannuation fund investment where there is a link between the fund and a member or a related party of a member. For example, it may be a work of art owned by the fund that is leased to a member or related party for display in their home or office. The rules state that all in-house assets owned by a fund must never be valued at more than 5 per cent of the total fund assets.
Problems may occur when the value of an in-house asset appreciates relative to the rest of the fund and over the year grows to, for example, 6 per cent of fund assets. Members can make a large contribution before 30 June to reduce the relative value of the in-house assets. If the problem is discovered after the end of the financial year, the fund is technically required to sell some of the in-house assets.
6. Change of Trustee
Fund auditors are expected to check that the fund has adequate title to all of its assets. All investments should be in the name of the fund. Problems could arise where funds might change from having individual trustees to a corporate trustee, or where a fund with individual trustees adds a new trustee.
7. Adding Contributions to a Pension Balance
Problems may arise where members add contributions to a pension balance without commuting the original pension and restarting a new one with the combined fund balance.
8. Penalties for the Trustee of a DIY Fund include:
- Failing to lodge the annual return on time and in the approved form
- Making a false or misleading statement on the form
- Having a tax shortfall or over claiming a credit through taking a non reasonably arguable position
- Refusing to provide an annual return
- Failing to keep and produce proper records
- Preventing access to premises and documents
- Failing to retain or produce declarations
- A general interest charge liability where tax remains unpaid after the due date
If you are operating your own SMSF, you need to ensure you comply with ATO regulations, or else, as explained above, it could result in hefty penalties and charges.
It is always best to consult your Financial Adviser should you be considering managing your own SMSF. The John Hopkins Group has a new Self Managed Superannuation Service that can ease the burdan of managing your own Self Managed Superannuation Fund, which is also worth considering.
Reference: ‘Mop up before the ATO gets dirty,’ The Australian, Wednesday 3 February 2010
For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.