The 10 SMSF rules that need urgent reform

Amid increasing pressure on trustees of self-managed super funds (SMSFs) to keep pace with the steady stream of quiet pronouncements from the ATO, we turn the spotlight on some overlooked SMSF guidelines in need of urgent reform in 2013.

As a relatively young but rapidly evolving model, SMSF compliance guidelines contain more than their fair share of unnecessary and arbitrary rules. Some of these are discriminatory, lack logic or simply make the process of providing for independent retirement unnecessarily difficult.

Chan & Naylor has compiled the following list of 10 SMSF rules that themselves either require retirement or modification.

The ATO must broaden the net of reform to ensure arbitrary SMSF ruling is afforded urgent review and the best interests of Australian investors are put first.

 1) An SMSF must have no more than four members.

SMSFs are most often used to provide for retirement income for all family members, yet four trustee positions would not be enough to cater for the average Australian household. The figure should respond to the nation’s needs as opposed to forcing families to either leave family members out of the SMSF or pay to set up an additional fund.

2) An SMSF cannot borrow money to pay for improvements to a single acquirable asset.

Should a trustee require money to renovate a property, it cannot be loaned in an SMSF because it is considered to increase risk, though trustees are still allowed to borrow money to purchase that property or asset in an SMSF.

3) A person must pay to set up separate holding trusts per single acquirable asset with debt.

Instead of adding acquirable assets with debt into the same trust structure, trustees must pay to set up another.

4) Life insurance (which is tax-deductable in super) cannot be moved from an individual name to a self-managed superfund unless the existing policy is cancelled and reissued.

Those who experience a change in circumstances while doing so, such as entering a new age group or different health, could find their new policy does not provide the same cover as their previous insurance policy, or worse still, cannot be re-written.

5) If a person is insured in super, they can only claim tax deductions for TDP (total and permanent disability) provided they are unable to work in any occupation.

This should also apply for a person’s own occupation.

6) It is prohibited to buy residential property or unlisted shares through an SMSF from a related party (wife, family member, etc.), even if supported with a registered valuation.

It is, however, acceptable to do the same with commercial property or shares. As long as the sole purpose test is passed there should be no limitation on from whom the asset is purchased if executed at arm’s length.

7) After the age of 65, a trustee is no longer entitled to the three-year average contribution.

This is age discriminatory. Anybody should be able to benefit from the three-year average contribution entitlement regardless of age.

8) Once a trustee reaches the age of 75, he or she may no longer contribute the full super contribution limit of $25,000 per annum.

This rule is discriminatory, especially as more Australians are both living and working for longer.

9) SMSFs must pay for manual amendments with each change to the SIS Act.

However, the big superfunds, covered by their associations, adopt legislation changes automatically. An SMSF deed, through legislation, should automatically pick up any changes to the SIS Act.

10) Trustees can suffer destructive penalties of up to 93% on over-contributions.

Excessive penalties should be axed for genuine errors.


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About

Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles


'The 10 SMSF rules that need urgent reform' have 3 comments

  1. Avatar for Property Update

    February 13, 2013 Self Managed Super Funds Australia

    You have provided excellent knowledge about SMSF rules. SMSF is restricted to four members, and each one must be a trustee. This is such a great resource that you have provided and give it away for free.

    Reply

  2. Avatar for Property Update

    December 7, 2012 Andrew Butterworth

    Good stuff. Too often the SMSF members are disadvantaged and ignored by goverment because we are so many. The fact that we are many could be our strength because we vote.
    Here is an opportunity to reduce the cost of establishing and running a SMSF. A model trust deed that covers all necessary reqirements, enshrined in legislation could be available to all SMSF trustees. This would simplify everyones life. The SMSF trustees could adopt the model SMSF deed by simply ticking the box on their annual returns. If the legislation changed your SMSF would automatically adopt the changes. No need to amend trust deeds or have a lenders solicitor read the deed. 80% of trustees would use the model deed because we only want to be compliant. More sophistocated members could still have a trust deed of their choosing if required. i would use a model deed.

    Reply

  3. Avatar for Property Update

    December 7, 2012 Henny Tasker

    Great article Ken. I like all 10 of your points. I would like to add one more VERY important necessary change.
    The $25000 contribution ceiling p.a. I can understand a need for a ceiling, but really $25 000, when we need at least $1000000 in super for hopefully a “princely” $50000pa in retirement.
    @ $25000pa, it would take 40 years, each and every year to deposit $1000000, obviously, you hope to earn income and growth on your deposits over the years as well – but we also need to allow for inflation and GFCs etc!

    I think many people would be in the same situation as us.
    We have spent our working lives paying off mortgages and raising our children.
    In our mid and late 50s now, the mortgage is paid off, the last child is just about to leave home and finally we are in the position of putting more aside in super – $50 000 combined a year at this late is far too little too late. We are of the generation where there was no compulsory guarantee levy for more than half of our working life and a time when many women took years off paid employment to rear children.

    I would also like to see insurance policies held within super to be paid from an “allowance” over and above the ceiling amount, because insurance policies again reduce the amount accumulating in super account.

    Reply


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