Self-Managed Superannuation Funds or SMSFs provide another avenue for people to create and manage their wealth.
Unfortunately, like many other highly regulated financial tools, they can be quite complex.
In fact, there a number of common errors that people often make in SMSFs, which can be avoided with professional advice from the outset, of course.
Let’s take a look at some of the major mistakes and omissions that people make when operating a SMSF so you are less likely to be one of them.
1. Sole purpose test
Your SMSF must meet the sole purpose test to be eligible for the tax concessions that are normally available to super funds.
What that means in simple terms is that it must be set up and operated for the sole purpose of providing retirement benefits to the members, or to their dependants if a member dies before retirement.
It’s vital to understand that an SMSF is a trust, but with special requirements and tax benefits.
The SMSF is administered by trustees who must include all of the members.
The main responsibility of a SMF trustee is to hold and invest the SMSF fund assets for the benefit of all the SMSF members for when they reach retirement or a condition of release.
Additional responsibilities include ensuring the SMSF is compliant with tax and superannuation laws to protect member interests.
This compliance will ensure that the fund is entitled to tax benefits, with the main ones being concessional tax rates on income and zero tax in the pension stage.
2. SMSF strategy
Another common mistake is not preparing a strategy for your SMSF.
There must be a strategy, preferably in writing, that describes the investment plans that the SMSF will adopt in its quest to provide retirement benefits.
The strategy should be regularly reviewed to ensure it fits with the individual members needs as well as changes in their financial and personal environments.
It’s imperative that investment assets should never be purchased or used for the benefit of the member outside of the super fund.
As mentioned above, failing the sole purpose test can have serious financial consequences for both the fund and the trustees.
The strategy should also ensure appropriate reviews of the SMSF deed are undertaken to maintain compliance with current legislation and the needs of members.
Another common omission is the consideration of insurance.
The thing is that the trustees must consider insurance as part of the SMSF strategy as a minimum requirement.
While there is no absolute need for a fund to hold insurance, there are many advantages for a member to do so.
A carefully researched investigation should be undertaken before deciding to include or ignore the SMSF’s insurance needs.
The reasons and supporting documentation, for either decision, should be maintained in the SMSF paperwork and made available if required to either the ATO, a member, or their dependants.
4. Binding Death Nomination
Do you know who owns the funds in a SMSF?
Many people incorrectly believe that funds in their super fund belong to them, but this is not the case.
A member or their dependant/s are only entitled to the funds if a condition of release is triggered.
Therefore a member needs to make provision for what happens to their funds in the case of their death.
This is typically decided via a Binding Death Nomination or BDN.
For a BDN to be valid it must be in strict compliance with what is required in the SMSF deed.
That’s because any deviation from the deed renders it as a non-binding death nomination.
If that happens then it will be up to the surviving trustees to decide how to pay out the member’s death benefits.
As you can imagine, with multiple member funds this could be contrary to the member’s actual wishes.
The bottom line…
Any of the above can have a significant impact on an SMSF.
That’s why you need to ensure you receive appropriate professional advice.
These issues — and others outlined in part two — can be resolved and corrected to ensure maximum SMSF benefits will be available in retirement.
At the end of the day, an SMSF is supposed to be a valuable financial tool.
Not one that is more trouble than it’s worth.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.