Robert Goodman Accountants Blog

Taking an extended job posting overseas? If you currently have an SMSF, you'll need a strategy for managing your super to ensure your fund doesn't breach any residency rules. Know your options and plan before you go.

When SMSF trustees travel overseas for an extended period, there's a risk their fund's "central management and control" (CMC) will be considered to move outside Australia. This causes the SMSF to become non-resident, resulting in very hefty penalty taxes. It's essential to plan for this before departing overseas.

The first step is to consider whether your absence will be significant enough to create a CMC risk. A temporaryabsence not exceeding two years isn't a problem, but whether the ATO considers your absence temporary or permanent will depend on your particular case. Your adviser can take you through the ATO's guidelines. If you think you'll have a CMC problem, the next step is to consider possible solutions.

Option 1: Appoint an attorney

Usually, every SMSF member must be a trustee (or director of its corporate trustee). However, an SMSF member travelling overseas can avoid CMC problems by appointing a trusted Australian-based person to act as trustee (or director) for them, provided that person holds the member's enduring power of attorney (EPOA).

Sounds simple? Just a word of caution: the SMSF member must resign as a trustee (or director) and be prepared to genuinely hand over control to their attorney.

If the member continues to effectively act like a trustee while overseas – for example, by sending significant instructions to their attorney or being involved in strategic decision-making – there's a risk the CMC of the fund may really be outside Australia.

You'll also need to comply with the separate "active member" test, which broadly requires that while the SMSF is receiving any contributions, at least 50% of the fund's total asset value attributable to actively contributing members is attributable to resident contributing members. To illustrate this, in a Mum-and-Dad SMSF where both spouses are overseas, a single contribution from either spouse could cause the fund to fail this test and expose the fund to penalties. In other words, you may need to stop SMSF contributions entirely while overseas. Consider making any contributions into a separate public offer fund.

Option 2: Wind up

Not prepared to give control of your super to an acquaintance? You might consider rolling your super over to a public offer fund and winding up the SMSF. This option completely removes any CMC stress (as control lies with the professional Australian trustee), and you can make contributions into the large fund without worrying about the "active member" test.

However, you'll need to sell or transfer out the SMSF's assets first – real estate, shares and other investments – and this may trigger capital gains tax (CGT) liabilities. These asset disposals will be partly or even fully exempt from CGT if the fund is paying retirement phase pensions, so talk to your adviser about your SMSF's expected CGT bill if you choose this wind-up option.

Option 3: Convert to a small APRA fund

Another option is converting the SMSF into a "small APRA fund" (SAF). Like SMSFs, SAFs have a maximum of four members but instead of being managed by the members they are run by a professional licensed trustee. This takes care of any CMC worries, and on conversion the fund won't incur any CGT liabilities because the assets remain in the fund – only the trustee structure changes.

The downside is that an SAF may be expensive because you'll be paying a professional trustee to run your fund. You'll also need to comply with the "active member test" so, as in Option 1, you may need to stop all contributions into the SAF.

Let's talk

If you're moving overseas for a while, contact us to start your SMSF planning now. We can help you explore your options and implement a strategy to protect your superannuation against residency problems.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

You've worked hard for your super, so make sure you access your benefits in the most tax-effective way possible. Members aged under 60 years will pay tax on their withdrawals, but if you're over 60 you generally will not pay any tax. But there are always exceptions! Find out what taxes apply before you jump in.

If you're aged 60 or over, you usually won't pay any tax on super benefits you withdraw. However, if you're under 60 your benefits will be taxed.

To understand how much tax you'll pay, it helps to remember that your super benefits are split into two components:

  • The "tax free" component of your benefits is not taxed when you make a withdrawal, even if you're under 60. This component is the part of your super balance made up of things like non-concessional (after-tax) contributions.
  • The "taxable" component is This component reflects things like compulsory superannuation guarantee contributions, salary-sacrifice contributions and personal contributions for which you claimed a tax deduction, as well as investment earnings.

You can't "cherry pick" which component you would like to fund your withdrawal. This means, for example, that if your accumulation account is 80% taxable and 20% tax-free at a particular point in time, any lump sum you withdraw at that time would also reflect this 80/20 split for tax purposes. Similarly, any pension you start at that time would have this 80/20 split locked in from the commencement day of the pension.

Therefore, the bigger your "taxable" component as a percentage of your account balance, the more tax you'll pay when you withdraw benefits. The applicable tax rates are as follows:

  • Pensions: the taxable part of your pension payments is taxed at your marginal rate, less a 15% tax offset.
  • Lump sums: the taxable part of a lump sum withdrawal is tax-free up to your "low rate cap" of $205,000 (for 2018–2019; set to increase to $210,000 for 2019–2020). This is a lifetime cap that you gradually utilise each time you withdraw a lump sum. Once you have fully utilised your cap, the remaining taxable part of any lump sum is then taxed at 17% (or your marginal rate, whichever is lower).

Several exceptions apply to these rules. First, if you're receiving certain "disability superannuation benefits" or accessing super before you've reached preservation age (eg on "compassionate" grounds), different tax treatment applies. Second, some people such as members of public sector or government superannuation funds are subject to special rules that mean they will pay some tax even if they're aged over 60.

Planning ahead

It's worth talking to your adviser to plan the best strategy for your super withdrawals. For example, if you're under 60, a lump sum may be more tax effective than a pension because of the "low rate cap" discussed above.

However, to access a lump sum before age 65 you must meet a relevant condition of release such as "retirement", whereas you only need to reach your preservation age in order to access a transition to retirement income stream (TRIS).

Your adviser can also help you explore the possible tax benefit of starting a full account-based pension (ABP). Unlike a TRIS, an ABP requires that you've met a relevant condition of release such as retirement, but the advantage is that it attracts a partial or possibly a full exemption from income tax on investment earnings inside the fund. So, as you can see, the decision to access your benefits is best made with professional advice that takes into account a range of factors including:

  • your age;
  • employment status and income;
  • lifestyle/cashflow needs;
  • tax efficiency of running a pension;
  • eligibility for the Aged Pension; and
  • special planning required if you hold more than $1.6 million in super (the current limit on the amount you can hold in full pensions like ABPs).

Need to access your super?

Talk to us today for expert advice tailored to your individual circumstances. We'll help you navigate through the tax rules to get the most out of your retirement savings.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Setting up a new SMSF does involve some cost, and one of the decisions you'll need to make is whether it's worth paying to establish a new company to act as trustee. The alternative option of appointing the members as individual trustees is initially cheaper, but this may have downsides in the long run.

A key benefit of having a corporate SMSF trustee is that recording ownership of assets like shares and property is easier. The ATO strictly requires that SMSF assets must be held in the name of the trustee(s). If an SMSF has individual trustees, every member will need to be a trustee and the title to all assets will need to be recorded in all of the members' names. This means that each time a member joins or leaves the fund (eg following a death, divorce or admission of an extra member such as an adult child), the title to all SMSF assets must be updated.

On the other hand, if the SMSF has a corporate trustee, the directors of that company will change, but the company itself will simply continue to hold title to the fund assets.

A change in members and therefore individual trustees also creates more internal paperwork for the fund. To remove or appoint an individual trustee, SMSFs generally need to have formal "change of trustee" documents prepared. This is usually more expensive and complicated than the process of appointing or removing a company director.

Another great advantage of a corporate SMSF trustee is that it makes it easier to comply with the legal requirement to keep the assets of the SMSF separate from any assets the members own personally.

Having a corporate trustee makes it easier for everyone – the members, their advisers, the fund's auditor and even the ATO – to identify which assets belong to the fund. And the risk of any confusion is reduced even further when you use a new company that has been set up to act solely as trustee of the SMSF (rather than re-using another company you already own, eg the corporate trustee of your family trust).

Corporate trustees are also beneficial for single-member SMSFs. The sole member can be the sole director of the trustee company and exercise full control over the fund. However, if the fund is set up with individual trustees, by law the member must find a second individual to act as a co-trustee. This issue becomes very relevant for many two-member SMSFs when one spouse dies and leaves the surviving spouse as sole member of the fund; for many couples, having a corporate trustee that continues in place is a huge benefit and avoids the need for the grieving spouse to find and appoint another individual trustee.

So, what are the costs?

Setting up a company entails the following costs:

  • Initial establishment costs, including ASIC's registration fee. Talk to our office about company set-up services to assist you with this process.
  • Ongoing annual fees payable to ASIC. This is usually $263 for most companies, but if you establish the company as a "special purpose" superannuation trustee company, you pay a reduced annual ASIC fee of $53.

Thinking about an SMSF structure?

If you're planning to set up a new SMSF, or are thinking of switching your existing SMSF to a corporate trustee structure, talk to us for expert advice and guidance. We can help you evaluate your trustee structuring options, handle the necessary documentation and company registration, and provide full support on all aspects of establishing and running your SMSF.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

For many people, SMSFs are a great option for building retirement savings, but they may not be suitable for everyone. Before you jump in, make sure you understand the differences between SMSFs and other types of funds to help you make an informed decision.

Thinking about setting up an SMSF? In this first instalment of a two-part series, we explain some of the key differences between SMSFs and public offer funds. Understanding these differences can help you have a deeper discussion with your adviser.

Management

While public offer funds are managed by professional licensed trustees, SMSFs are considerably different because management responsibility lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company).

This is an advantage for those who want full control over how their superannuation is invested and managed. However, it also means the members are responsible for complying with all superannuation laws and regulations – and administrative penalties can apply for non-compliance. Being an SMSF trustee therefore means you need to be prepared to seek the right professional advice when required.

If you intend to move overseas for some time (eg for a job posting), an SMSF could be problematic because it may be hit with significant tax penalties if the "central management and control" moves outside Australia.

On the other hand, members of public offer funds can move overseas without risking these penalties because their fund continues to be managed by a professional Australian trustee.

Costs

Costs are a key factor for anyone considering their super options. Fees charged by public offer funds vary, but are generally charged as a percentage of the member's account balance. Therefore, the higher your balance, the more fees you'll pay. This is an important point to remember when weighing up a public offer fund against an SMSF.

SMSF costs tend to be more fixed. As well as establishment costs and an annual supervisory levy payable to the ATO, SMSFs must hire an independent auditor annually. Additionally, most SMSF trustees rely on some form of professional assistance, which may include accounting/taxation services, financial advice, administration services, actuarial certificates (in relation to pensions) and asset valuations.

These costs may be a more critical factor for those with modestly sized SMSFs. This year, a Productivity Commission inquiry found that larger SMSFs have consistently delivered higher net returns compared with smaller SMSFs, and that SMSFs with under $500,000 in assets have relatively high expense ratios (on average). The Commission's report has attracted some criticism that it has overstated the true costs of running an SMSF, but in any case, anyone considering an SMSF needs to think carefully about the running costs involved and make an informed decision about whether an SMSF is right for them. For members with modest balances, an SMSF will often be more expensive than a public offer fund, but this needs to be weighed up against the other benefits of an SMSF.

Investment flexibility

A major benefit of an SMSF is that the member-trustees have full control over their investment choices. This means they can invest in specific assets, including direct property, that would not be possible in a public offer fund. For example, a business owner wishing to transfer their business premises into superannuation would need an SMSF to achieve this. SMSFs can also take advantage of gearing strategies by borrowing to buy property or even shares through a special "limited recourse" borrowing arrangement.

However, with control comes responsibility. SMSF trustees must create and regularly update an "investment strategy" that specifically addresses things like risk, liquidity and diversification. And of course, the SMSF's investments must comply with all superannuation laws. In particular, transactions involving related parties (eg leases and acquisitions) can give rise to numerous compliance traps, so SMSF trustees must be prepared to seek advice when required.

Need help with your decision?

Contact our office to begin a discussion about whether an SMSF can help you achieve your retirement goals, in conjunction with your independent licenced financial planner.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.  

Did you know that if you're aged between 60 and 64, you can access your super if you change jobs – without retiring permanently? The rules about when you can access your super on "retirement" grounds vary depending on your age. Find out exactly what's required for your age group.

Recently, AMP reported that its superannuation support team has seen a surge in questions about the rules for accessing super. It says people are especially unaware about the retirement rules that apply in the 60-to-64 age range. Here, we break down the requirements by age group and clarify what you must do to "retire" and access your benefits.

Under preservation age

Before you've reached your preservation age, you can't access super on any "retirement" grounds. Your preservation age depends on your date of birth, as shown below:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

If you need to access your super before preservation age, speak to your adviser about whether you might qualify on other grounds such as severe financial hardship, compassionate grounds, terminal medical condition or permanent or temporary incapacity.

Preservation age to age 59

Once you've reached preservation age you can potentially access your benefits on "retirement" grounds, but if you're under 60 you must have the intention of permanently retiring. Specifically, two things need to occur:

  • an arrangement under which you were gainfully employed must come to an end (eg you leave a job); and
  • the trustee of your super fund must be reasonably satisfied that you intend never to again become gainfully employed (either on a full-time or part-time basis).

For these purposes, "part-time" gainful employment means at least 10 hours a week. This means you can "retire" even if you intend to work a small amount each week.

If you don't meet the retirement test, but need to access some of your benefits, consider starting a "transition to retirement income stream" (TRIS). The only eligibility requirement is that you've reached preservation age. However, you'll be limited to withdrawing a maximum of 10% of your account balance each financial year, and you won't qualify for an income tax exemption on pension asset earnings. Once you've met a release ground such as retirement or reaching age 65, these restrictions will no longer apply.

Age 60 to 64

Once you reach age 60, you can potentially access your super without permanently retiring (although you can, of course, retire permanently if you choose).

All that's required is that an arrangement under which you were gainfully employed comes to an end (eg you leave a job) after you reached age 60.

That means it's okay to start another job, or if you were previously working two jobs, it's sufficient that you leave only one of them. In these cases, you can access a full pension (with an income tax exemption on pension asset earnings, and no 10% maximum annual withdrawal limit) or a lump sum.

Importantly, the Australian Prudential Regulation Authority (APRA) recognises that this is a valid way to access your super, but says that in its view, any future superannuation benefits you then accrue from an ongoing or new job wouldn't be accessible. To access those benefits, you'd need to meet a further release ground (eg reaching 65 years or "retiring" again).

Age 65 and over

Once you reach age 65, all of your superannuation benefits become accessible. There's no need to meet any "retirement" or other release grounds.

Need to access your super?

We can refer you to independent financial planners to guide you through the requirements for "retirement" and other release grounds, and help you withdraw your benefits in the most tax-effective way. Contact our office today on 3289 1700 or email reception@rgoodman.com.au. 

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Transferring a commercial property into an SMSF can be a great way to build retirement savings and take advantage of the concessionally taxed SMSF environment. But when acquiring property from a related party, it's vital the property meets the "business real property" test. Make sure you know the essential elements of this test when exploring this strategy.

Holding property in an SMSF can certainly have tax advantages. The rental income and capital gains are concessionally taxed, or even tax exempt to the extent the property supports retirement phase pensions. So, if you run a business and own your business premises, or are simply an investor with a commercial property, you may have thought about transferring the property into your SMSF.

The general rule is that SMSFs aren't permitted to acquire assets from a related party of the fund (which includes the members, their relatives and related trusts and companies). However, there are a few limited exceptions, including "business real property" (BRP) acquired by the SMSF at market value. This is the only type of real estate that an SMSF may acquire from a related party.

What is BRP?

BRP is property used "wholly and exclusively" in one or more businesses. The ATO says this generally means the entire area of the property must be used in business, and there should be no non-business use (eg personal use), unless it's a very minor or insignificant non-business use.

It doesn't matter who is conducting the business. Whether it's the property owners (eg the SMSF members or their related trust or company) who run the business, or an unrelated third party who rents the premises for their business, the property can still qualify as BRP.

Classic examples of BRP include a shop where a retail business is conducted, a factory where a manufacturing business is operated and office space leased solely to business tenants.

Farms can also qualify if they are used in a primary production business, and there's even a specific allowance for a residential area on the property of up to two hectares (provided the predominant use of the overall property is for the farming business and not residential use).

There are many other types of property that are not so straightforward. Whether a property meets the "BRP" definition depends on the particular facts of how it is used. The ATO provides the following examples of property that would not be BRP:

  • In many cases, residential rental premises. Many typical "Mum and Dad" investment property owners simply derive passive rental income and don't carry on a business. In contrast, if someone owns and rents out residential property as part of a large-scale property investment business, the land would potentially qualify as BRP.
  • Similarly, many holiday rental properties where the owners are passive investors who do not run a business of letting holiday accommodation. Even if the owners hire an agent to manage the property, it will not be BRP.
  • Mixed-use properties where there is business use but also non-business use that is more than minor. The ATO gives these examples of mixed-use properties that would not be BRP: a commercial warehouse where the landlord reserves 10% of the floor space for her own personal storage use, and a mechanic business run from a home garage attached to the mechanic's private dwelling.

Other considerations

Make sure you get professional advice before jumping in. Transferring BRP into an SMSF raises a number of tax and compliance issues:

  • The property must be acquired at market value.
  • Once the property is held in the SMSF, any lease to a related party must comply with the relevant superannuation laws.
  • You may have capital gains tax (CGT) and stamp duty liabilities when you transfer the property into the SMSF. Your tax adviser can help you determine whether you qualify for any small business CGT concessions.

Looking to get into property?

Contact us today to discuss a tax-effective SMSF strategy for your commercial property, in conjunction with your financial planner.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.  

 

The ATO has recently highlighted the top three compliance breaches it sees among SMSFs – a helpful insight into the areas that are frequently tripping up SMSF trustees. The ATO says it will work with cooperative trustees to help them rectify breaches and get their fund back on track. But even with the best intentions, fixing these problems can be expensive, time-consuming and stressful. Our handy list of the top three compliance traps will help you avoid these headaches.

Loans or financial assistance to members (21.1%)

SMSFs may not lend money, or provide other "financial assistance", to a member of the fund or a relative of a member. This sounds like a simple enough rule, but it's not just loans of money (both documented and undocumented) that fall foul of this restriction – giving "financial assistance" is a broad concept and the ATO interprets this to include scenarios such as:

  • selling an asset to a member or relative below market value, or purchasing an asset above market value;
  • paying for services performed by a member or relative in excess of what the SMSF requires (or paying inflated prices for such services); and
  • financial assistance provided indirectly, eg where an SMSF enters into an arrangement with another entity who in turn provides financial assistance to an SMSF member or their relative.
  • Members facing personal financial difficulties may be tempted to skew the terms of an SMSF arrangement to benefit themselves personally. If you are experiencing financial stress, seek advice about your options (including whether you may be able to validly access your superannuation benefits on financial hardship or compassionate grounds).

In-house assets (18.7%)

The in-house asset (IHA) rules limit the amount that SMSFs can invest in arrangements controlled by related parties. There are three types of IHAs:

  • a loan to a related entity (eg a loan to the members' family trust);
  • an investment in a related company or trust (eg buying shares or units in a company or unit trust that the members or their associates control); and
  • an asset of the fund (other than commercial property) leased to a related entity.
  • SMSFs are not permitted to hold IHAs worth more than 5% of the fund's assets. This means SMSFs must have no or very minimal IHAs.

The rules here, including certain exceptions that apply, can be quite technical. In particular, the rules regarding when a person or entity (such as a company or trust) is "related" to the SMSF are broader than some trustees might imagine.

The key is to seek professional advice before transacting with any party that is, or could be, related. If you later discover your fund has an IHA issue, at a minimum you will need to dispose of the problem investments.

Failure to keep personal assets separate from the SMSF (12.8%)

SMSF trustees must keep the fund's money and assets separate from those the trustees own personally. This means cash should be kept in a separate bank account in the fund's name, and the fund's ownership of assets (eg property and shares) must be carefully registered.

Appointing a company as trustee of the SMSF that is used solely to act as the trustee of that fund is a great practical step to ensure compliance with this rule.

Stay off the ATO's radar

Proactive planning is the best way to ensure your SMSF investments are compliant and your retirement savings are secure. Contact us for expert advice. We can refer you to a licenced financial planner for investment advice on your SMSF's proposed investments.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

One of the key investment rules that SMSF trustees must be familiar with are the laws restricting "non-arm's length" dealings. In essence, SMSFs are prohibited from dealing with a related party of the fund on uncommercial terms and, where these terms are too favourable to the SMSF, hefty tax penalties can apply.

Proposed laws before Parliament are set to tighten these rules further, so now is a good time for SMSF trustees to ensure they understand this area.

What is non-arm's length income?

Any dealing between an SMSF trustee and a related party (such as a member or member's relative, or a trust or company the member controls) must be on "arm's length" terms. This means SMSFs cannot enter into transactions that are less or more favourable to the SMSF than commercial transactions.

Importantly, where an SMSF is not dealing at arm's length with the other party and it earns more income than it might have been expected to earn under an arm's length arrangement, all of the income from the arrangement – not just the excessive component – is taxed at a penalty rate of 45%.

This is in contrast to the usual 15% tax rate for funds in accumulation phase (or 0% to the extent the earnings come from assets supporting a pension). This is known as "non-arm's length income" (NALI) and is illustrated by the following example:

Bob's SMSF owns a commercial property that it leases to Bob's manufacturing business. The parties sign a lease with rent set at $1,200 per week, even though the market rate of rent for comparable commercial premises in the area is around $800 per week. This results in the SMSF earning more rental income than it would under an arm's length arrangement. All of the SMSF's rental income – not just the amount by which it exceeds the market rate – will be taxed at 45%.

Proposed changes to capture expenses

Proposed amendments before Parliament will expand this regime so that income received by an SMSF that has not been dealing at arm's length will also be taxed as NALI if, in gaining or producing the income, the fund has either not incurred a loss or expense that it might have been expected to incur if the parties had been dealing at arm's length, or incurred a loss or expense that is less than the amount it might have been expected to incur.

One specific scenario that the amendments aim to capture is property acquired under a limited recourse borrowing arrangement where the rental income earned by the SMSF is at market rates, but the interest expenses paid by the SMSF to a related party lender are less than market rates. Under the proposed new laws, the rental income would be taxed as NALI because, even though it is at market rates, it is earned in connection with a scheme where the SMSF has not incurred arm's length expenses.

The new laws also clarify that the NALI measures apply to capital expenditure. For example, where an SMSF acquires an asset below market value, not only will the rental income be taxed as NALI, but also the capital gain that results when the SMSF later disposes of the asset.

Know when to seek advice

The key to ensuring your SMSF does not fall foul of the NALI rules is to seek advice before entering into any arrangements with related parties. Contact us today if you are thinking about an investment opportunity for your SMSF that may involve a related party.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

For many Australians, the control and flexibility offered by an SMSF makes this an attractive option for managing their superannuation. However, being an SMSF trustee carries significant responsibilities. In a case last year (Hart and Commissioner of Taxation), the Administrative Appeals Tribunal underlined the consequences that can flow when SMSF trustees do not take their responsibilities seriously.

The facts

A married couple were the trustees and members of their SMSF. After their marriage broke down in 2012, the SMSF's auditor notified the ATO that the fund had breached a superannuation law. An ATO audit then uncovered many more compliance issues. Some of the activities that concerned the ATO included:

  • a supposed "investment" by the SMSF in a related Philippines company, where the face value of the issued shares was a fraction of the $100,000 paid for them;
  • withdrawal of other moneys without meeting any condition of release;
  • the husband declaring the wife's benefits in the SMSF had been "forfeited"; and
  • the transfer of the couple's "hobby farm" into the SMSF that was, among many issues, not correctly registered in the name of the trustees and not transferred at market value.

These actions involved serious alleged breaches of numerous superannuation laws. Ultimately, the Commissioner exercised his power to disqualify the husband from being a trustee of a superannuation fund. The husband applied to the Tribunal for a review of the Commissioner's decision.

The Tribunal's findings

By law, the Commissioner may disqualify a person if either the number or seriousness of the person's contraventions of superannuation law justifies their disqualification or the person is not a "fit and proper person" to be a trustee.

The Tribunal said the first ground was met because it was "abundantly clear" the husband had breached superannuation laws numerous times and the breaches were "extremely serious". The Tribunal also found that the husband unquestionably failed the alternative "fit and proper person" test.

Notably, the Tribunal had observed that the husband gave "less than satisfactory" answers and tried to deflect responsibility or confuse the issues. They also noted that he was not candid when dealing with the ATO.and that there was a "serious suspicion" that he had falsified signatures on documents. The Tribunal therefore affirmed the Commissioner's decision to disqualify the husband from acting as an SMSF trustee again.

Lessons for SMSF trustees

This decision highlights the importance of honesty and cooperation when dealing with the ATO during an audit, and also that the ATO and courts will not look favourably upon SMSF trustees whose ignorance of the law and behaviour indicate they are not a "fit and proper person" to be a trustee.

Understand your responsibilities

In order to hold benefits in an SMSF, you must be prepared to genuinely undertake trusteeship of the fund. Contact our office if you are considering establishing an SMSF and need more information about the duties and responsibilities of SMSF trustees.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

The Productivity Commission's recent report on Australia's superannuation system reveals some concerning weaknesses in the APRA-regulated funds sector – particularly for millions of member accounts in "MySuper" default funds. It also identifies three areas of concern for SMSFs. The report should prompt all Australians to assess whether they currently have the right superannuation arrangements in place for their circumstances.

The release of the much-anticipated report comes as Australia debates the merits of raising the compulsory superannuation rate, scheduled to increase from the current rate of 9.5% of workers' earnings to 12% by 2025–2026. Given the size of the industry and the importance of superannuation to our standard of living, a well-functioning superannuation system is vital. Here we outline some of the Commission's key concerns about the current system's performance.

While funds have, on average, performed well, the Commission finds there is significant variation in investment performance across funds, leading to poor outcomes for some Australians. Over 5 million member accounts are in funds experiencing "serial underperformance".

To illustrate the problem, the Commission notes that a full-time worker, whose superannuation fund is in the bottom quartile, could retire with a balance 54% (or $660,000) lower than if they experienced returns of the top quartile. Concerningly, lack of competitive pressure in the default fund (MySuper) market means poorly performing funds are not being weeded out, creating an "unlucky lottery" for workers who may end up in one of these employer-nominated funds.

The Commission is also concerned that many Australians still have multiple superannuation accounts – paying multiple fees and often multiple insurance premiums – and this significantly erodes their savings. In some cases, members are even paying for duplicate income protection insurance policies where they will only ever be eligible to claim on one policy.

Access to information and quality of advice is another area of concern. While there is plenty of choice in the market, even financially literate members sometimes struggle to choose a superannuation product that's right for them because it is difficult to access good information.

To address these issues, the Commission recommends the following changes, among others: reforming the process of signing members up to default products; more regulatory accountability for providers of default products; and giving consumers easy-to-understand information.

What does the report say about SMSFs?

The Commission identifies three key areas of concern for SMSFs:

  • Small SMSFs: While large SMSFs perform similarly to APRA-regulated funds, SMSFs with under $500,000 in assets perform "significantly worse", on average.
  • Advice: The Commission identifies a need to improve SMSF advice, and recommends specialist training for persons providing advice to set up an SMSF.
  • Limited recourse borrowing arrangements (LRBAs): Around 7% of SMSFs have an LRBA to purchase an asset. While the low level of borrowing in the sector means there is currently no "material systemic risk", the Commission recommends active monitoring of SMSF borrowing to ensure it does not generate systemic risks in future.

Planning your superannuation

The Commission's report highlights the need to ensure you have the best superannuation product in place for your circumstances. Contact us if you have any questions about the report or wish to discuss your superannuation arrangements.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.