12 things NOT to do with your SMSF

The ability to take control of your retirement savings is a key driver in the continued growth of SMSFs.  However, being a trustee comes with responsibility to ensure that your fund meets strict regulatory and compliance obligations.  Failure to meet these can result in significant penalties, along with the potential loss of the fund’s complying status.

Here is a list of 12 things not to do with your SMSF:

1. Do not setup a fund to illegally access your super

The approach taken to illegal early release of superannuation benefits by the ATO has seen a significant increase in the amount of people setting up SMSFs to gain access to their retirement savings.  Even with existing funds, it can be tempting to access money from the SMSF bank account where a business is in financial difficulty.  You should avoid this as significant penalties and criminal sanctions can be applied by the Regulator.  In addition, any benefits withdrawn are likely to be assessed personally at the highest marginal tax rate. It is important to remember that there are options available to access part of your superannuation under financial hardship or compassionate grounds.

2. Do not transfer residential property you own into your SMSF

This is one of the most common questions I get asked by individuals as people begin to take a greater interest of shifting wealth into superannuation.  Superannuation law does not allow for the acquisition of assets from members (s.66, SIS Act).  There are however exceptions to this rule including listed shares (until 30 June 2012), widely held trusts, business real property and in-house assets (up to 5%).  Residential property is not an exception and therefore not allowed to be acquired or contributed into the fund from a member.

3. Do not provide financial assistance to you or a family member from your SMSF

Another common question is whether a property purchased by Mum & Dad in their SMSF can be leased (at arm’s length) to a child or other family member.  Whilst the intention may be to deal on ‘commercial terms’ (arms-length) with the tenant, the fact that they are related prohibits the ability to do so.  You are deemed to be providing financial assistance, along with breaches of various other aspects of super law (e.g. sole purpose test).

4. Do not try to re-report contributions just because you’re now in an Excess Contributions Tax position

A key focus of 2011/12 ATO compliance program is to investigate re-reporting of contributions for members through the SMSF Annual Return.  An updated Superannuation Prosecution Plan for July 2011 to June 2014, outlined that the ATO intended to target issues of excessive contributions where SMSF members seek to avoid or reduce the excess contributions tax by falsely reporting contributions (including amending). You don’t want to find yourself on the wrong end of the stick with this issue – as penalties and criminal sanctions on top of an ECT liability will make things look very ugly!!

5. Do not lodge your SMSF Annual Returns beyond the due date

It must frustrate the ATO that year after year the on-time lodgement statistics are not better than what they are.  In a speech conducted by Stuart Forysth, Assistant Commissioner, Superannuation in September last year, he commented that 79.39% of all 2010 lodgements had been achieved by 5 July 2011.  That’s more 20% not done 12 months after the end of the financial year.  The ATO will be pleased with the increased powers they are to receive from 1 July 2012 via the Stronger Super reforms to penalise trustees for tardiness.  There is however scope for the ATO to enforce non-compliance on SMSFs, however this ‘nuclear’ option is rarely enforced.  See my previous post on this topic.

6. Do not have the title to a property held by the trustee where SMSF limited recourse borrowing arrangement is in place.  

I have heard of some ‘horror stories’ of how certain limited recourse borrowing arrangements have unfortunately been established.  Most common is the title to the acquired property is held in the name of the SMSF trustee, not the custodial trustee.  You must ensure the asset is held in the bare/holding trust whilst the loan is in existence, which means the title must be held by the trustee of the bare trust.  You need to consider state-by-state jurisdictions around stamp duty requirements, but I always recommend having the custodial trustee established before purchase (rather than rely on a nomination clause – as allowed in some states).

7. Do not use borrowed funds to make property improvements

With clarity in September 2010 by the ATO on key concepts with limited recourse borrowing arrangements, SMSFs can now make improvements to property assets to the extent that you don’t change it into a different asset (i.e. character and nature of property changes).  Importantly, SMSFR 2011/D1 confirms that improvements can be made with the SMSF’s own resources (e.g. cash), but not with borrowed funds – this is an important distinction between the two!!  s.67A(1)(a)(i) only allows for borrowings to be maintained for the acquisition of a single acquirable asset along with any associated costs in repairing or maintaining the asset – no improvements!!

8. Do not have the fund assets mixed up with your personal or business assets

All fund money and assets must be kept separate from personal or business money and assets. You mustn’t use the fund’s money for personal or business purposes under any circumstances.  This is a covenant with superannuation law to ensure that fund investments are made only to provide for members in retirement.

9. Do not have you super fund audited by the same tax agent that prepares your SMSF financials and Annual Return

The issue of independence within the SMSF audit community has been progressively improving through increases in professional standards requirements and now we’ll see further improvements through the Stronger Super reforms (ASIC auditor registration).  As a trustee you need to be conscious that it is highly probable that where an accountant providing the administration is also auditing the fund is in breach of their professional obligations (referring to APES 110 – Code of Ethics for Professional Accountants).  This is predominantly relevant to sole practitioners and smaller public practices.

10. Do not contribute into superannuation if your were 65 or older from 1 July 2011 and you have met the ‘work test’

Unless you meet a work test of completing 40 hours work within a 30 day consecutive period, you are in eligible take make personal contributions into super.  Any contributions made into superannuation cannot be accepted by the fund and must be returned.

11. Do not access your superannuation unless you have met a ‘condition of release’

We discussed illegal early release earlier, but it is important to understand that to access superannuation money by lump sum or pension you must meet a condition of release, for example retirement.

12. Do not take an amount less than your prescribed minimum pension for the financial year

The ATO has confirmed within tax ruling TR 2011/D3 that where a member does not meeting their minimum pension obligation for the financial year, the fund loses its tax exemption from the start of the financial year and all benefits are treated as lump sums.  This means that the fund moves from a 0% tax rate in pension phase back to 15%.  This will also affect the tax-free/taxable proportions of, the pension accounts, including where multiple pensions were running the accounts move back to a single member interest in the fund.

The Government’s Stronger Super reforms to take effect from 1 July 2012 are providing the ATO with greater powers to adopt a sliding scale administrative penalty regime based on the seriousness of breaches conducted by trustees.  It is commonly known up until this stage the ATO really only had two options to enforce compliance – a feather duster or the ‘nuclear’ option; there was no in between.  These new powers will allow the Regulator to determine how hard they need to hit to ensure trustees comply with their obligations, which may include mandatory education.

I’d be interested to hear from my readers further areas that trustees should ensure that they ‘steer clear’ of when it comes to maintaining the complying status of their SMSF?

Reflecting on SMSFs in 2011

As the 2011 year comes to a close, it’s a time to ponder where the SMSF industry has come from in the last 12 months and also where it is heading…

This time last year, we had just seen the Government’s response to the Cooper Review, with many of these reforms now only 6 months away (although there does appear for some work still be done on FoFA and the Approved Auditor registration reforms).

In reflection, here’s some of the interesting things impacting SMSFs from 2011:

  • Total SMSFs grew by 7%*  to 450,498
  • Total assets grew by 3.4% to more than $397 billion; predominantly driven by an increase in cash held by SMSFs.  Property also grew in asset value for the year, however shares on the other hand, were the asset class hard hit due to the continued global financial problems.
  • Excess Contributions Tax continued to grow as a key industry issue, with an increased number of assessments by the ATO… and to think that the most recent published statistics showed that the ATO had only just started on the 2009-10 financial year, where the Labor Government halved the concessional contribution cap!!
  • We did however see some sort of olive branch by the Government, with a proposed ‘once-off’ refund of Excess Contributions Tax.  This was not retrospective though, taking effect for the 2011/12 financial years and onwards.
  • We continue to await details of the proposed concessional contribution cap extension for those 50 years of age and over with account balances of less the $500,000.  A budget commitment in 2010 and re-affirmed in 2011, we currently appear no closer to an outcome from Government to this administrative nightmare!!
  • The year also saw two important rulings issued, although the industry responses to these could not have been any further apart.  The views expressed by the Commissioner on key concepts of limited recourse borrowing arrangements were embraced by many who were pleased in the practical approach taken to the single acquirable asset definition and also the ability to make improvements to an asset using the SMSFs own resources.  The more controversial ruling issued in July 2011 was when a pension commenced and ceased.  Many of the views expressed by the Commissioner, whilst not necessarily having changed since a previous interpretation in 2004, were broadly criticised with their interpretation and also of the unintended consequences.  With all responses to the ruling also in the hands of Treasury to review, it is quite obvious that further action will be taken here ensure there is no ‘revenue leakage’ if the industry is found to be correct.
  • The year also saw the introduction of section 62A and SISR 13.18AA relating to collectables and personal use assets acquired from 1 July 2011.  These new rules implemented from the Stronger Super reforms intend to address the legitimacy of SMSFs acquiring these assets for investment purposes, rather than gaining a current day benefit (e.g. hanging a painting on your wall at home).
  • Streamlined TPD insurance tax deductions have also been introduced, distinguishing the level of deductibility based upon whether an insurance policy is classified as ‘any occupation’ or ‘own occupation’.
  • A range of ATO interpretive decisions impacting pension payments, death benefits with stepchildren, and assets acquired where a charge already exists.
* these figures were using Sept-10 to Sept-11 ATO statistics as these are the most recently published by the Regulator.
In my view, 2011 has been more talk than action…  I’m not suggesting that it’s necessarily been a bad thing; however it has been a year where the Future of Financial Advice and Stronger Super reforms have been heavily debated, with most of these reforms expected (but not yet assured) to take effect from 1 July 2012.  Add to these reforms, unresolved discussion papers on extended contribution caps, refund of excess contributions, amongst other things that reiterate my views on the year.
Many people in the financial services industry are already “reformed out” from 2011, however the real challenge lies ahead in 2012.


Having your SMSF capitalise on a market recovery

The last month or so has seen the ASX recover strongly after a disastrous start to the new financial year.  Whilst we are well short of the ASX highs of mid-2007, we may start to see some further gains with some hopeful news emerging from Europe and other parts of the world.

As a result of this recent positive change, it is important from a strategic point of view, to start thinking about some of the key strategies that will bolster you or your client’s superannuation savings in a market recovery:

1. Boost the 10% pension limit with a Transition to Retirement ‘reboot’ – an effectively implemented transition to retirement strategy can add tens of thousands of dollars to a member’s retirement savings.  For some clients who regularly take a 10% maximum pension, recovering markets can provide the ability to roll back the existing income stream and reset the pension with a higher balance.  Conversely, if clients are looking to take the smallest pension possible, especially in light of the 25% reduced minimum for the 2011/12 financial year, now may be an opportune time to roll back their pension to accumulation to reduce the amount required to be taken for the financial year.

2. Locking in tax-free proportions – the use of recontribution strategies is still one of the most effective tools to build greater tax efficiency into income streams under age 60 and also for estate planning purposes.  The creation of multiple pensions with additional contributions or recontributions allows a member to potentially benefit from a higher tax-free proportion when drawing an income stream from the fund.  Subject to the level of pension taken each financial year, you can continue to grow the higher tax-free super balance when markets rebound.

In poor markets, there is some significant tax savings that can be obtained by rolling back pensions to accumulation phase (full commutation) to ‘absorb’ the negative returns against the member’s taxable component, rather than proportionately against their tax-free and taxable components.  At an appropriate time in response to recovering markets, the ability to recommence the pension allows for the member to lock in a higher tax-free component, saving tax on pensions taken prior to 60 and providing long-term benefits for non-dependant beneficiaries.

3. Have you considered segregation? – to further benefit the use of multiple pensions, trustees have the ability to segregate specific assets to different members, pools of members or different superannuation interests.  For example, by applying the fund’s growth assets to a member’s super interest with a 100% tax-free proportion, it can potentially:

  • accelerate the grow of the account balance;
  • provide a greater pension amount that can be withdrawn under a transition to retirement income stream; and
  • decrease the fund’s potential future exposure to death benefits tax for non-dependants.

Segregation may also be useful where the fund is not 100% in pension phase (i.e. one member in accumulation, one in pension).  It could be used to assist in the realisation of a particular asset which has risen significantly off a low cost-base.  By applying segregation, the particular asset(s) with a significant capital gain is fully exempt from tax, rather than partially exempt by having an unsegregated fund.  It is important that any segregation strategy is appropriately documented by the trustees to show specific assets being applied to a particular member, interest or pool of members.

4. Time to build reserves? –  Reserves within a self-managed super fund can play an important current day and longer term estate planning role.  For the majority of SMSFs, you typically see any positive returns applied towards each member’s balance.  However, it is important to consider whether to capture some of these positive earnings into fund reserves to look at implementing a range of strategies including future anti-detriment payments, self-insuring members, enabling future crediting of 100% tax-free pensions, etc.

Fund Reserves can play an integral role in any SMSF and are typically generated by earnings over time.  Planning to capitalise on recovering markets allows for SMSFs to implement many of these reserving strategies effectively.

These are just some strategies that you can start to plan with your clients to help bolster your client’s superannuation savings in recovering markets.

(C) The SMSF Academy 2012
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