Greater enforcement to rectify contraventions a key part of the new SMSF landscape

The powers provided to the Australian Taxation Office (ATO) to deal with issues of non-compliance by SMSF trustees has been reasonably inadequate, something that was acknowledged by the Cooper Review Panel as part of the Super System Review.  The ATO in many respects had been known to have two options in dealing with trustee contraventions:

  • the “feather duster”approach – where limited penalties or undertakings could be applied against SMSF trustees ;or
  • the “nuclear”option – where fund’s were made non-complying for more serious breaches

A key outcome from the Stronger Super reforms to take effect from 1 July 2012 is the greater powers to be provided to the Regulator when dealing with contraventions by SMSF trustees.  Currently, where the fund trustees have contravened part of superannuation law, it is the trustee that may enter into an Enforceable Undertaking (EU) with the ATO to remedy the breach.  The Regulator may then accept or reject the enforceable undertaking from the trustee.

This however changes from next financial year, where new powers will allow the ATO to direct a SMSF trustee to rectify a contravention where it remains unrectified.  These powers will provide the ATO with greater capabilities to improve the timeliness and efficiency of remedying these issues.

These powers will range from providing penalties and sanctions on fund trustees, where SMSF Annual Returns may be outstanding or more serious breaches including loans to members, in-house asset issues or breaches of financial assistance.  Part of this rectification process may also require SMSF trustees to undertake mandatory education to continue to carry on their role as a trustee.

Since taking over as Regulator of SMSFs in 2000, the ATO has taken an educative approach to ensure trustees understand and comply with superannuation law and their ongoing statutory requirements.  Whilst the education process plays an important part in the overall ATO compliance program, we will expect to see a greater role in enforcement to protect the integrity of this burgeoning superannuation industry.

Changes to definition of a SMSF

Changes to definition of a SMSF

It is regularly acknowledged that a Corporate Trustee is a far superior trustee structure rather than individual trustees. There has however been an anomaly with the definition of a SMSF within section 17A of the SIS Act that ultimately required a SMSF with members under 18 (i.e. child) to have individual trustees.

Section 17A(3)(c) states that certain other persons may be trustees:

(3)  A superannuation fund does not fail to satisfy the conditions specified in subsection (1) or (2) by reason only that:

(c)  if a member of the fund is under a legal disability because of age and does not have a legal personal representative–the parent or guardian of the member is a trustee of the fund in place of the member; 

The oversight in the law that exists with this paragraph is that a parent or guardian of a member can act as a trustee of the fund – it does not extend to directorship of a corporate trustee.  The ultimately means that any SMSF with child members where a corporate trustee exists does not meet the definition of a SMSF.

As a result of this issue, the ATO through TIES (Tax Issues Entry System) has escalated this issue with Treasury to amend the law.  Prior to Christmas, we have seen Tax Laws Amendment (2011 Measures No. 9) Bill 2011 introduced to amend the definition of a SMSF.

This bill amends paragraph 17A(3)(c) so that if the trustee of the SMSF is a body corporate, a parent or guardian can be director of the corporate trustee in place of a member who is a minor and does not have a legal personal representative.

This amendment will apply from 8 October 1999, as this was when paragraph 17A(3)(c) was inserted.

Twelve SMSF Resolutions for 2012

A Happy New Year to all my readers.

The New Year provides us with time to think about and assess goals for the coming year.  Whether we actually achieve them or not, well that’s a whole different matter…

I have provide below 12 resolutions that you may with to consider in either setting up or running a Self Managed Super Fund:

1. Join more than 850,000 Australian’s already taking control of their retirement using a SMSF

Call me biased, but I truly believe SMSFs are the best superannuation vehicle in Australia as they provides you with a real sense of ownership in making decisions about your retirement savings.  SMSFs also provide you with greater choice in how you can invest, whether it be via property, shares, cash, fixed interest or even artwork and collectables.  It’s not about thinking you can “do it better yourself”, but in my view it is more about the greater engagement that you have with building your retirement nest egg.  Watch my videos on Thinking about Self Managed Super and Setting up a SMSF to understand more about the benefits of SMSFs.

2. Does my trust deed need to be updated?

It never ceases to amaze me about the lack of education that is provided around the importance of the fund’s deed (I commonly refer to the trust deed as the ‘book of rules’).  Far too often I see SMSFs with trust deeds that are not only out of date, but in some circumstances mean that the fund is not a Self Managed Super Fund (as the rules haven’t been updated to align with changes to superannuation law).  Only last year I saw a fund which had not been updated since it started in 1982!!

Your SMSF is no different to your car – to run at its optimum, it needs be serviced.  As super and tax laws change, your trust deed needs to be serviced to accommodate these amendments and take advantage of strategies.

Your resolution may be to speak to a SMSF Specialist about whether your deed needs an update!!

3. Should I really have a corporate trustee instead of individual trustees?

With only 1 in 10 SMSFs over the last couple of years being setup with a corporate trustee, many people will probably ask “why would I have a corporate trustee instead of individual trustees”?  Whilst having a company act as trustee can be more costly, it can provide a range of administrative and estate planning benefits, including the ability to run a single member fund (as a sole director).  Further details of some of these important considerations can be found on the ATO website.

I’m obviously not the only SMSF professional within the industry with this view…  take a look at the results of the current poll on the SMSF Professionals page on LinkedIn:

It was also acknowledged within the Super System Review that corporate trustees were a superior trustee structure, however the choice of trustee should always rest with the individuals.  You should think about your own circumstances as to when a corporate trustee may be a more suitable option for you.

4. The year of the property gear?

With clarification of the limited recourse borrowing rules (section 67A & B, SIS Act) by the ATO in September 2011 (SMSFR 2011/D1), there now appears to be greater scope for SMSF trustees to consider the use of borrowing to acquire property.  I use the words “year of the property gear” because I expect this area to grow significantly in 2012 as the ATO ruling provides some much-needed clarity on the ability for a SMSF to make improvements to an asset where the fund uses its own resources.  Add to this the clarification on what qualifies as a single acquirable asset, we will see a much broader range of investors looking to acquire property through a SMSF.

The benefits of property in super can be significant, in particular the tax exemption that can be obtained on any capital gains once you reach retirement (or transition to retirement).  With the ability to use two sources or inflows to meet repayments (1. rent and other fund income; and 2. contributions), it can allow for an accelerated repayment strategy to maximise the return you can achieve from the investment.

Refer to my example presentation on Slideshare to understand the analysis further about whether property investing within a SMSF is a suitable strategy for you?

5. Should I maximise my concessional contributions for the current year?

The 2012 financial year is the last year of the 5 year transitional concessional contribution cap that was introduced with the Simpler Super reforms from 1 July 2007.  Whilst the Labor Government halved the contribution cap in 2010, we still await details of the proposed law changes to extend this cap beyond 1 July 2012 for those over 50 with account balances under $500,000.

From 1 July 2012, the current concessional contribution cap will reduce to $25,000 for everybody regardless of age.  This is a reduction from $100,000 that was available only 3 years ago.

You can only presume that the Labor Government will look to increase contribution caps once they have delivered on their commitment to bring the budget back to surplus in 2013.  The cynic in me says we see announcements in the lead up to the next election!!

6. I might need to review my contributions to ensure you don’t get caught with ECT??

Excess contributions tax (ECT) has been a growing issue as people look to maximise on the benefits of superannuation.  With many cases of inadvertent breaches falling on deaf ears with the ATO, it is absolutely critical that you appropriately manage your contribution levels each financial year.

We have seen an announcement by Government to allow a ‘once-off’ refund of up to $10,000 for breaches of the concessional contribution cap, but I wouldn’t be relying on that as a management tool to deal with excessive contributions.  Take an active role in tracking yours (or your clients) contributions.

7. I’m thinking about transferring listed shares into my SMSF? You need to do so before 30 June 2012!!

One of the recommendations from the Super System Review was to prohibit the ability for individuals to be able to transfer existing shares held personally into a SMSF (by way of off-market transfer).  This recommendation was ultimately supported by Government within the Stronger Super reforms and is intended to become law from 1 July 2012.

Therefore, you have a small window remaining to look at this strategy to transfer listed shares you own into a SMSF.

8. Do I qualify for the co-contribution this year?

The Government within their Mid-year economic and fiscal outlook (MYEFO) 2011-12 announced changes to reduce matching entitlement from $1 for $1 (100%) up to $1,000 to 50% for the 2012-13 financial year.

For income earners between $31,920 and $61,920 for 2012, you can receive a matched amount from the Government based on your qualifying entitlement.  See the ATO website for further details of eligibility.

9. How much pension can I draw this financial year?

With financial markets still languishing, individuals drawing an income stream have the ability to draw down a 25% reduced minimum pension for the 2012 financial year.  This means that if you minimum pension is ordinarily 4% (55-64), your minimum pension for 2012 is only 3%.  In the MYEFO, the government recently extended the minimum pension draw down relief for the 2013 financial year as well.

These rules apply to account based pensions, including transition to retirement income streams and market linked pensions.

View details of the minimum pension and reduced pension limits for the 2012 financial year.

10. What’s the most tax effective way to draw my pension for the financial year?

A controversial ruling issued by the ATO in July 2011 (TR 2011/D3), provided scope for a member who has retired to potentially take their benefits as a lump sum payment and have the benefits treated as a pension for the year.  This is beneficial where you may wish to receive an in-specie payment such as a transfer of shares or property from the fund.  This can also be beneficial for people under 60 who could have a withdrawn amount applied against the pension limit for the financial year but taxed against the lump sum tax rates.

See my previous article for further details.

11. Is my current death benefit nomination up-to-date?

What happens to your superannuation benefits in the event of death is not determined by your Will – it is based on the instructions that are left within a member’s death benefit nomination.  Unfortunately, not enough attention is spent looking at the important aspects of what can happen with super benefits when somebody dies.  This could include a pension, lump sum or combination of both, subject to the beneficiaries being tax dependants.

Within SMSFs, there are several options available to members subject to the fund’s trust deed. A member may wish to have no nomination (at all), have a statement of wishes (non-binding), or binding nomination.  The binding nomination may be lapsing (i.e. review and renew every 3 years) or non-lapsing.

12. I need to establish a comprehensive SMSF estate plan?

Simply having a death benefit nomination and a Will is not sufficient in this day and age with a range of associated risks that could derail how you ultimately want your benefits to be dispersed when you are no longer here…

It is important to not only think about the issues when you are no longer here, but address the ‘life risks’ such as if you lose your marbles!!  In my view, a comprehensive SMSF estate plan needs to intertwine the Will, death benefit nomination, Enduring Powers of Attorney, and Guardianship.  You should also consider within your Will the creation of testamentary trusts for nominated beneficiaries to help protect from marital, business and other risks that might expose your death benefits ending up in somebody else’s pocket!!

There they are…  Is there something there for you (or your clients) to consider reviewing or/and implementing for 2012?

Setting up a Self Managed Super Fund

After making the decision to setup a self-managed super fund, there are a range of important decisions and steps about how to structure and operate your fund to get it started.

When setting up a self-managed super fund, you take on the role of either a trustee or director of a company which acts as the trustee of your fund.  A trustee is a person or company that holds and invests the fund’s assets for the benefit of each member’s retirement.  You have the choice when establishing a self-managed super fund to have individual trustees or appoint a company to act as the trustee.

More than 70% of all self-managed super funds are established with individual trustees, with more recent statistics showing only 10% of new funds being setup with a corporate trustee.

It is a commonly held view that a corporate trustee is a far superior trustee structure within a SMSF, which was recently supported in the recommendations to government in the Super System Review.  Further information on this topic can be founding in my article, “which trustee structure is right for me?”

As a trustee or director, you are responsible for running the fund and making decisions that affect your retirement interests and that of each member. Therefore, you must act in the best interests of all fund members when making decisions, ensuring that the fund is managed separately from your own affairs and that the money in the fund is only accessed when the law allows you to do so, such as in retirement.

There are some important considerations when setting up a self-managed super fund, including deciding on whether each member will act as individual trustees or a company act as trustee in which you and the other members will be directors.  You also need to ensure that you are eligible to act as a trustee; therefore you can’t be:

  • a bankrupt,
  • someone charged with a dishonesty offence; or
  • have been subject to superannuation law penalties.

Furthermore, you must ensure that the fund meets the residency requirements to be a complying fund and receive tax concessions.

A self-managed super fund is allowed up to 4 members, with each member required to be a fund trustee or director.  This requirement is to promote engagement and equal responsibility amongst all members of the fund.  In addition, no member can be an employee of another member, unless they are related and finally no trustee can be paid for their duties or services as being a trustee.

It is possible to setup a self-managed super fund as a single member fund. Where the fund has a corporate trustee, you can also be the sole director of a trustee company.  Alternatively you must be only one of two directors ensuring that the other director is either related to you or is not employed by you.   Where you wish to have individual trustees, you must have two trustees in which in addition to you, must include a person you are related to or is not employed by you.

The process to setup a SMSF

The setup of a SMSF requires a range of steps to be completed to start operating your fund.  The first step is to arrange for a trust deed to create the fund.  This is the “book of rules” that will govern its operation and will include rules around acting as a trustee, membership, contributions, benefits and anything else to do with the fund.  The preparation of the book of rules is prepared by a lawyer who will draft the necessary rules for you.  This may be a standard set of rules or may require tailoring to meet specific requirements of the fund members.

The fund will also be required to appoint fund trustees, which must be consented to in writing.  You as a trustee will need to sign a trustee declaration within 21 days of becoming a trustee or director, stating that you understand your duties and responsibilities as a fund trustee or director of the corporate trustee.  You will need to complete for various registrations with the Australian Taxation Office to not only become regulated, which must be done within 60 days, but to also apply for a Tax File Number (TFN), Australian Business Number (ABN), along with potentially requiring additional registrations including GST and Pay-As-You-Go withholding (PAYGW).

You must apply to become a member of the fund and once accepted have the fund record your tax file number to ensure that it can accept certain contributions.

You will be required to setup a bank account for your self-managed super fund to manage the fund’s operations including accepting contributions, making investments, receiving investment income and pay all fund expenses and liabilities.  It is important that the super fund bank account is kept separate to any individual or business bank accounts that you may have.

Once the fund is legally established, it is important that an investment strategy is prepared that sets out the investment objectives and how you plan to achieve them, having regard to issues including diversification, risk and likely return from investments, liquidity of fund assets, the ability to pay benefits as and when they fall due, such as in retirement and generally meeting the member’s needs and circumstances.

You may wish to engage a licensed financial adviser to help you prepare an investment strategy, but you (and the other fund trustees) are responsible for managing the fund’s investments.   It is important that an investment strategy is documented to ensure that you can evidence your investment decisions and show that they comply with the law.

In addition, as the fund gets underway, you should give appropriate consideration to the appointment of professionals including an approved auditor, accountant or fund administrator, lawyer and financial adviser.  They will be able to assist in a variety of areas including the ongoing reporting requirements, insurance needs of the members and any death benefit nomination which sets out who receives your super benefits in the event of death.

Setting up a self-managed super fund gives you the opportunity to actively manage your own super and make your own investment choices, but with it comes responsibility.  Regardless of whether someone takes a more active role within the fund, each trustee or director is equally responsible.

Watch more of our videos on The SMSF AcademyTV.

Understanding your roles and responsibilities as a SMSF trustee

The ability to take control of your retirement has been the driving factor in the continuing growth of self-managed super funds.  They are a great way to provide for your retirement, but it is important to understand that with this greater control comes an increased responsibility as a trustee of your fund.

The ultimate responsibility of the fund always rests with the fund trustees, regardless of whether professionals such as accountants and financial advisers are engaged to assist you in operating the fund.  Therefore, it is very important that you understand what you need to do.

There are a range of duties and responsibilities that come with being a trustee and these include:

  • Making sure the fund’s sole purpose is to pay retirement benefits to members or to beneficiaries in the event of death
  • Accepting contributions and paying benefits as a pension or lump sum in accordance with superannuation and tax laws
  • Making investment decisions and complying with any restrictions contained within superannuation law and the fund’s trust deed
  • Ensuring an approved auditor is appointed for each income year
  • Making sure that the fund’s administrative tasks are met, such as lodging the SMSF annual return on time and ensuring the fund’s records are kept up-to-date; and
  • Reviewing and updating the fund’s trust deed and investment strategy

All of these responsibilities form part of the trustee declaration form that is required to be signed by all new trustees of a self-managed super fund.

Failure to comply with your duties and responsibilities can result in the Tax Office taking actions including imposing penalties, taking enforceable action against you including disqualification as a trustee and potentially even making your fund non-complying.

NB. Members of the SMSF Academy won’t have to worry as they will have available to them the appropriate information, education and tools to look after all of these issues that we have discussed.  The SMSF Academy is designed to give trustees the confidence and peace of mind to meet their duties and responsibilities as trustees.

Click here to register your interest about the launch of The SMSF Academy

What reporting obligations are required for my SMSF?

The Trustees of a self-managed super fund have various reporting obligations to both the Regulator and its members.  Many of these duties need to be completed for each financial year, by specified due dates with the Tax Office.

It is a requirement for all funds to have to lodge a SMSF Annual Return, which includes the tax return, reporting of each member’s contributions, information for the regulator about the fund and details of the auditor and completed audit.

It is important to note that the Annual Return cannot be lodged until an independent audit report has been issued.  The fund also has an obligation to prepare financial accounts each year, including the preparation of an operating statement and statement of financial position.  Upon completion of these statements, the fund arranges for the completion of an audit to examine the fund’s financial position and assess the overall compliance of the fund with superannuation law.  In addition, a self-managed super fund is required to prepare and maintain records relating to decisions affecting the fund.  For example, these may include decisions around buying and selling investments, starting a pension and the appointment of a fund auditor.

Copies of financial statements, the SMSF Annual Return and statements lodged with the tax office must be maintained by the fund trustees for a minimum of five years.  However, minutes of meetings, changes and appointments of trustees, declarations, and copies of all reports given to members must be kept for at least for 10 years.

Engaging Service Providers

Subject to your own level of skills and amount of time you have to devote to running your self-managed super fund, SMSF trustees can engage a variety of service providers to assist them in their duties and responsibilities.   For example, a lawyer will be required to prepare the trust deed for your SMSF, and would also be involved in many instances with the preparation of estate planning documentation including death benefit nominations.

Your fund will be required each year to engage an approved auditor to conduct an independent audit.  Most trustees will also typically also engage an accountant or specialist administrator to prepare the statutory reporting requirements for your fund including financial statements and SMSF Annual Return.  For pension paying funds, an actuary may be required to be engaged to prepare a certificate of tax exemption.    Trustees may also consider using a licensed financial adviser to assist in the strategic direction of the fund, the investment strategy and any insurance needs of the members.

The Australian Taxation Office as regulator of self-managed super funds has several publications available for trustees regarding thinking about, setting up and running a self-managed super fund.  These are must read documents for all trustees to ensure that they have an appropriate level of understanding about their roles and responsibilities as a trustee.

Links to these publications are shown below:

(C) The SMSF Academy 2012
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