[Podcast] Do you have an SMSF? Should you have an SMSF? With Ken Raiss

Superannuation, or ‘super’, aims to help keep us financially secure when we move into a post-work lifestyle and has been a crucial part of Australian lives for more than 100 years.

While most Australians have their superannuation in industry funds, more and more Australians are looking at setting up their own self-managed super fund.

In today's show, we discuss whether you need one or not.

So if you have an SMSF my discussion with Ken Raiss will be very valuable for you, and even if you don't have one at present, it's probably worth understanding why so many Australians have set up their own Self-Managed Superannuation fund.

Do you have a Self-Managed Superannuation fund? Do you need to have an SMSF?

Apparently, there are around 600,000 SMSFs in Australia – which is an increase of 4% on the previous year and an increase of 6% over the five years from 2016–17.

And there were almost 1.115 million members of these SMSFs.

Of course, every employed Australian should have a superannuation fund – either managed by someone else or by you.

So that’s the discussion of my chat today with Ken Raiss, director of Metropole Wealth Advisory.

Do you need an SMSF?

Many people set up an SMSF to have greater control over their investments or operating costs. Under the Superannuation Industry Supervision Act and ATO, there are strict requirements for the operation and management of the SMSF.

Any contravention can make your fund non-complying, and the ATO can penalize the fund with up to 47% of the fund assets. Depending on the severity of the infringements, there can also be criminal charges.

Many SMSF funds are prepared on a set-and-forget policy. This can lead to issues when legislation changes or circumstances change. An SMSF is administered by the ATO, and as such, changes to legislation do not automatically update an SMSF as occurs with industry and retail funds. The only way to pick up new legislation is for the trustees of each SMSF to individually make the change. Operating an SMSF with old and outdated legislation is a prime example of how an SMSF can become non-compliant.

On top of these legislative update requirements, many SMSFs have errors or omissions which can lead to either noncompliance or poor performance due to a poor understanding of what strategies are allowable (as opposed to performance due to asset choice).

Today’s podcast looks at two SMSF questions:

1. Errors
2. Omissions that, while not a contravention, may cause the fund to operate at a sub-optimal level.

Five most common errors

1. Individual trustees.
   1. Each member of the SMSF must be a trustee.
   2. The trustee is the name that appears as the legal owner with the share registry or property title etc.
2. Binding Death Nominations
   1. There are several forms in which a member can pass on their superannuation balance on death, and a BDN is one of these.
   2. The BDN must be exactly in line with what the SMSF deed prescribes. All too often, they do not. If it is not, then it is a non-binding nomination.
3. Investing in related entities
   1. There are strict rules about what an SMSF can invest in.
   2. An SMSF cannot invest in a related party as this would be a contravention.
4. Strategy
   1. Al superfunds, including an SMSF, must have a formal strategy.
   2. The strategy should be in writing and in sufficient detail to prescribe asset allocation, expected returns, and the requirements of the members.
5. Asset valuations
   1. Assets should be regularly valued to ensure they are meeting strategy expectations.
   2. Certain assets, such as collectibles and real estate, must be insured for replacement value.
   3. Assets are for the benefit of providing retirement income and a pension, and as such, assets cannot be for the current enjoyment of members.

Omissions

1. Type of pension
   1. There are two main pension types
   2. The typical one is that when a member dies, that member balance is passed to an approved person. This means that assets are sold, and CGT is paid. It may not then be possible for those funds to be returned to the fun by another member due to contribution caps or limits. The sale of assets may also be inopportune in the market, and you cannot sell part of a property in a multi-member fund.
2. Death member’s payments when in the accumulation phase
   1. The typical SMSF is written in a way that requires the sale of assets and the cash or in specie payment of the deceased member’s balance
   2. This will require the assets to be sold, which triggers CGT and takes the funds out of a safer environment for asset protection and tax concessions.
3. Management of individual spousal balances
   1. There are strict limits on the size of funds allowable, which can cause issues with contributions and tax-free free components allowable on retirement
   2. In a happy spousal relationship, there can be various strategies that will allow the buildup of members’ funds between the spouses to manage the various caps, including a cap on the overall size of the member’s balance.
4. Death member payments with disproportionate spousal balances
   1. This can cause asset sales in non-liquid assets such as property
   2. This can be avoided in certain circumstances by allowing funds to remain in super
5. Death member benefits when property is in SMSF
   1. SMSF deeds are normally written in a way that would require the sale of a property on the death of a member
   2. A correctly worded deed can allow the property to be retained in super in many cases
6. No successor director in one director trustee company
   1. If a fund has only one member, then if individual trustees are in place, the legislation requires a second nominated trustee. This is usually a family member. This can cause tension as a fund member must have another person in the decision tree. That second person also takes on a legal obligation.
   2. In these situations, a one-member fund can have a corporate trustee with that member being the sole director.
7. Equal voting is when the fund has multiple members with very different balances
   1. Voting is made based on a show of hands, i.e., 2 outvotes 1. The member's fund balance has no impact on voting rights. Someone with $1k has the same voting power as someone with $1 million.
   2. In some family situations, this can cause friction, especially if a BDN has not be legally executed.

Links and Resources:

Ken Raiss, director Metropole Wealth Advisory

Have a chat with Ken Raiss to ensure you have the correct asset protection strategies in place and your SMSF Trust Deed is documented correctly– click here

In turbulent times like we’re experiencing why not get the team at Metropole on your side to give you holistic property and wealth advice– find out more here

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Favourite Quotes

“If you’ve got these funds to set aside for you and your family’s future, you really should be working them optimally.” – Michael Yardney

“Many people don’t realize that the superfund isn’t part of your will. It’s a totally separate legal entity.” – Michael Yardney

“Paying for experiences – that gives you a really good bang for your buck when it comes to happiness.” –Michael Yardney

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