10 Traps of Poor SMSF Administration

This article focuses on the traps of poor administration versus breaches. The common breaches that occur are well documented in a number of ATO publications.

Traps that occur are more innocuous until inevitably it is too late and the financial ramifications become unavoidable, which is regrettable when in most instances, with a bit a forward planning and good compliance, they could be avoided.

The list below is in no particular order, but all are of high importance. In our opinion the 10 Ten traps for SMSF fund's are:

1. No tracking of components
2. No tracking of RBL position
3. No tracking of Eligible service date
4. No retirement plan
5. No beneficiary election
6. Assets not held in the name of trustees
7. Poor advice
8. No understanding of trustee obligations
9. No investment strategy
10. Deed not current

No Tracking of components

SMSF administration has very little to do with preparing financial statements such the balance sheet and profit or loss. It has a lot to do with member statements. Different components such as undeducted contributions are afforded varying preservation and tax treatments. Now depending on when these funds were contributed into super will have significant implications on whether or not they can be accessed prior to retirement.

This has significant implications for a number of people who may have need to draw on these benefits, if they satisfy the conditions of release prior to retirement.

Also, losing track of these components, means the difference between paying little or no tax, and being taxed at ETP rates, and also having benefits counted towards the Reasonable Benefit Limit (RBL) versus not having the benefits counted.

No retirement Plan

When investors take out an investment, most people ask what sort of return will this investment provide? Yet, most people do not ask the same question of super.

Without knowing what your super entitlements can pay you at retirement, how will they ever know if it is going to be enough?

No Tracking of RBL Position

The Reasonable Benefit Limit (RBL) is the maximum amount over a person’s lifetime that can be withdrawn taxed concessionally. RBL amounts are recorded when amounts are taken either as a pension, redundancy or eligible termination payment.

By not tracking these benefits, clients can often find out too late that the desired type of pension they would prefer, in particular an allocated pension which is assessed as a lump sum RBL may not be afforded all the preferential tax treatment they had planned on, i.e. commutations assessed 39.5% on post 1983 and 47% on pre 1983, and losing some or all of the 15% rebate on the pension income received.

No tracking of Eligible Service Date

The eligible service date (ESD) is one of the most important elements to be considered when evaluating the various strategies for retirement planning. Losing track of an early service date particularly what is known as the pre 1983 dates, can cost people thousands of dollars, particularly when evaluating the common strategy of rollout and recontribution strategy.

Service dates can arise from a number of sources such as redundancy from an employer, or date that a person commences employment with an employer (not the date the employer started contributing to super), and life insurance endowment policies.

No beneficiary election

It is important to know that superannuation sits separate to a person’s Will, and whilst they may elect to pay the proceeds of their super to their will, this may not be necessarily what they may have intended, nor the best tax decision. When people fail to keep these documents current or have not completed them in the first place, they risk potentially paying a 16.5% tax on the withdrawal from super to the estate.

Assets not held in the name of trustees

Aside from the fact that this is a reportable breach under the legislative provisions, when assets are not held in the name of trustees a person put them at risk in the event of bankruptcy, divorce or any number of other circumstances. The trustee then has the major issue of having to fight through the courts to have them separated away from their personal assets and back into the super funds name. This is an expensive exercise, when a bit of care could avoid the issue altogether.

Not getting the right advice

Poor advice is a common occurrence, which unfortunately does not help the trustee of a SMSF escape liability for the funds non compliance, or a person from paying too much tax.

Examples of poor advice

• That when a fund goes into pension phase, the fund does not have to prepare accounts, tax returns etc…
  
• All funds that have member in pension phase do not need actuary certificates
  
• That says you can stay at that investment property for the weekend
  
• That it is okay to have artwork/paintings located on your living room wall
  
• That withdrawing money from the fund and have your spouse lend it back to the fund
  
• Not having a written lease agreement for leased properties
  
• Borrowing via a unit trust arrangement
  
• Allowing yourself or any related party to live in a house in which your super has any involvement (especially if a unit trust)
  
• Being in pension mode allows you to use your super account to go shopping
  
• Buy a residential house off your father

Also:

• Keep contributing to super for a tax deduction even if you are above your RBL threshold
  
• Having assets such as shares at historic cost
  
• The fund is paying tax in pension phase
  
• Does not make any reference on liquidity issues
  
• Does not know that pension members are entitled to a 15% rebate and some of the pension paid may be tax free
  
• Does not make suggestions on various forms of pensions
  
• Is not aware of why the ESD is so important
  
• Does not make suggestions on any strategies which may assist you
  
• Never inquires if your will and estate planning is in order

Ultimately, trustees get what they pay for, and taking the cheapest option in advice can ultimately end up costing much, much more. It could be suggested if the adviser cannot answer questions without constantly saying, “can they get back to you”, or “it’s a grey area”, or “we’ll have to look into that”, then perhaps they do not have a great knowledge on the subject.

No understanding of trustee obligations

The Australian Taxation Office (ATO) has made a great attempt over the course of the last few years to help educate trustees on what their roles and responsibilities are in the management of a SMSF through the ATO publication “Roles and Responsibilities of Trustees”, and have also attempted to explain their position as regulator and the responsibilities of associated parties such as auditors, tax agents, actuaries, and administrators in the ATO publication “it’s your money…but not yet!”

No investment strategy

Aside from the fact that this is a legislative requirement, and that it is required to be reviewed regularly, and it is a notifiable breach if a fund does not have one in existence, the issue is prudent management

Any sound business prepares budgets, plans cashflows and sales targets etc… As with investments, this is about planning to achieve a return on investments that satisfies the fund risk profile, liquidity, and determining if the investment yield sort conforms to the investments held by the fund.

In other words how will they be able to reflect on how well, or they have, or not have invested at year end, if they did not know what they were planning to achieve to begin with.

Deed not current

A deed is the bible by which trustees run their fund, hence if the deed is unclear as to what a trustee should do in particular circumstances, then it is not a good guide. The deed also needs to provide sufficient flexibility and range that conforms to the fullest extent of the legislation.

Hence, trustees need to be aware that a Deed will only be as current as the legislation that existed at the time the Deed was prepared.

Some people also have a mistaken perception that the coverall provision in most deeds which states “if the deed is inconsistent with the legislation, then the legislation will prevail”, will cover any future changes in the law. This is incorrect.

To draw an analogy, if the legislation was the fence surrounding a football field, and the deed is the boundary of the football field, the above statement is only helpful in the event that the boundary fence shrinks, i.e. becomes more restrictive. What happens when the boundary fence is extended, then the boundary lines of the deed become relatively more restrictive on trustees.

For example, the Government announced the Government co-contribution scheme in last years budget, with government stating it will match contributions paid by a member into their own fund. Never before had it been envisaged that the government would be contributing to a members account, and hence all deeds previously drafted had only taken into account a member or employer contributing into a member’s account.

Now if a trustee has not updated their deed, for this circumstance, and decides to bank the government’s cheque for the CO-contribution, then the fund will be non complying!

Disclaimer:

No investment advice provided to you.
This web site is not designed for the purpose of providing personal financial or investment advice. Information provided does not take into account your particular investment objectives, financial situation or investment needs.

You should assess whether the information on this web site is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this web site. You can either make this assessment yourself or seek the assistance of any adviser.