I ask the question, why do Australians want to have a Self-Managed Superannuation Fund (SMSF)? It may seem to be rather an unremarkable question, but one that I feel is sometimes overlooked.
I can already see the scrunched up eyebrows of readers, wondering where I am going with this. Well, by this I mean that the reason actually given is often a perceived reason and if we were to dig deeper into what the actual motive is, then I believe the answer given would be completely different.
From my observations, what is showing up on the regulatory front (ie the movements of the Australian Taxation Office) demonstrates that the reasoning behind the choice to setup an SMSF is not fully uncovered at the beginning.
The introduction of administrative penalties, enforced trustee education, approved SMSF auditor requirements and the mere fact that the ATO plans to add another 15,100 funds to its audit list for income tax compliance in the 2013-14 financial year, suggests to me, that the reasoning behind people choosing to establish an SMSF can be misguided.
Common sense reasoning suggests that the increased regulation is a result of the ATO trying to catch up with the rapid growth of the SMSF sector. With about 40,000 new funds being established in the 2013 financial year, this does make sense.
Furthermore, the relative health of the SMSF sector is in good stead, with only two per cent of funds each year being reported to the ATO, for reportable contraventions of the SIS Act 1993.
The majority of SMSF trustees gladly meet their obligations, with only a small minority that don’t. What the ATO is concerned with though, is the number of funds that lodge their annual returns late, trustees or SMSF professionals misunderstanding their obligations, approved auditors not reporting contraventions and funds being setup for the sole purpose of withdrawing funds illegally.
What does this all mean though? I believe that the ATO assumes that the amount of funds being reported as contravening the SIS Act 1993 is lower than the reality, and that the number of non-compliance is greater.
This is where the danger of misunderstanding the role and obligations of a SMSF can get people into trouble as they don’t fully understand the responsibilities that encompass being a trustee. Along with this, the misunderstanding of the limitations that accompany a SMSF means that some trustees are making misinformed decisions, even before they become a trustee. The solution to this, I envisage, is for more active, rather than reactive, trustee education and for it to be mandatory for all prospective trustees. Is this unreasonable? I believe not, especially considering the significant growth in the SMSF sector.
An SMSF can be a great investment vehicle and is highly tax effective. However, before considering an SMSF, it is worth taking a few basic steps:
- Firstly, how much in superannuation do I have? Is it enough? Have I fully considered the time and work involved to administer a SMSF? The ATO has some great videos on considering and running an SMSF, which provide some valuable insight into the inner workings thereof.
- Secondly, do your due diligence and speak with your financial adviser and accountant, and don’t be afraid to ask questions. Be like a sponge and gather as much information as possible. The more you know about SMSFs, the more of an informed decision you can make.
- Finally, ask yourself the question, why do I want an SMSF?
Adam is head of the SMSF division and Accounting division at Newcastle Financial Planning and holds a Bachelor of Commerce and Diploma of Financial Planning. He specialises in assisting business and SMSF clients.