The seven sins of SMSF advice
There is cause for concern that not all SMSFs are “playing by the rules”. Here are seven situations in which SMSF trustees, and their advisers, typically go wrong.
1. SMSF establishment
Many SMSFs are set up because either the client or their accountant thinks they need one. Given the availability of sophisticated retail superannuation offering these days, the only circumstances in which an SMSF is essential are when they wish to do one or more of the following:
• Buy a specific piece of real estate
• Borrow money to buy an asset within their super fund
• Acquire an asset held by a member
• Sell an asset of the fund to a member
Even with the last two points, if the asset in question is an ASX-listed share, the same outcome can, effectively, be achieved on market with many good retail super funds offering access to anything listed on the ASX.
2. In-house asset limits
The limit to five per cent of the proportion of funds' assets deemed "in-house" is an easy rule to breach in that, as assets can fluctuate in value, the limit can be inadvertently breached where other assets have fallen in value relative to those deemed "in-house". This scenario can occur even more easily where the fund is in pension phase.
3. Segregation of assets
Where a fund contains both accumulation and pension accounts, be they for the same or different members, it is required to either segregate the assets backing the respective accounts or obtain an annual actuarial certificate stating that the pension assets are sufficient to fund the required pension(s). In some instances, advisers erroneously believe that segregation is mandatory, while others are failing to ensure the annual procurement of the required certificates.
4. LRBA requirements
While too numerous to list here, typical breaches include not ensuring that the assets acquired and the loans to purchase them are in the correct entity names, allowing borrowers to offer security in excess of fund assets (including the provision of personal guarantees by members) or allowing borrowings to be implemented in excess of "reasonable" limits. Although the last is not necessarily a breach of regulations, it often constitutes an arrangement that would result in a potential breach of the next point.
5. Investment strategy
While most fund "kits" provide a template for this, they are either so generic as to be meaningless, take no account of the specific circumstances of the members or are not reviewed on a sufficiently frequent basis to maintain their suitability.
6. Insurance
One of the most recent changes to the obligations of SMSF trustees is that they must regularly review the specific insurance needs of the members. The key word here is "regularly". The ATO has stipulated that it is not sufficient to address the member's insurance needs only on joining the fund, but also to review them from time to time.
While it is possible to arrange all four forms of personal insurance cover (life, total and permanent disablement, trauma and income protection) under superannuation (typically for cash flow advantages for the members), it can often lead to insurance proceeds being trapped within the super fund where the member's circumstances have not met a "condition of release".
7. Assumption of cost
Although many retail superannuation products are relatively expensive, given the requirements for annual financial statements, tax returns, audit and actuarial certificates, plus the regulatory body costs associated with a SMSF, such as the ATO Supervisory Levy, it is highly likely that a SMSF ultimately proves a more expensive option than a well-priced retail super platform. Furthermore, while it is possible to have either individuals or corporates as trustees of SMSFs, which is appropriate to your fund depends on the arrangements the fund wishes to undertake. That said, if a corporate trustee is required, there are additional costs with the creation and maintenance of this corporate entity.
Conclusion
In summary, while SMSFs are, arguably, the most sophisticated and efficient retirement savings vehicle on the Australian landscape, they are not for everyone. So, do your homework before you place your clients into an SMSF arrangement.
Wayne Leggett, principal, Paramount Wealth Management
