Adam Hoskins, SMSF Specialist Adviser and Head of Accounting at Newcastle Financial Planning
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 with an infinite amount of answers, 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. I sense the scrunched up eyebrows are now entire orifices. For good reason, as mine too is displaying similar movements whilst I continue to type. I do implore though, that I am going somewhere with this.
A little background then, to add some content. I take, from observations, what is showing up on the regulatory front (i.e. the movements of the Australian Taxation office (ATO)) as an indicator that the reasoning behind choice to setup an SMSF is not fully uncovered at inception. This is all hypothetical and merely hearsay, however, 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, to me, is indicative that the reasoning behind choice to establish an SMSF is, on occasion, either misguided or misunderstood. This, I understand, is a bold statement and the common sense reasoning behind the increased regulation, is the ATO affording more resources into the SMSF sector, simply trying to catch up with the rapid growth therein. With about 40,000 new funds being established in the 2013 financial year, this does make sense, and sends a rather large cloud over my theory.
Furthermore, the relative health of the SMSF sector is in good stead, with only 2% of funds each year being reported to the ATO, for reportable contraventions of the SIS Act 1993. This appears to be minute and immaterial in the scheme of things. My theory now, looks somewhat like a toddlers’ dummy, chewed, sucked and spat out that many times it is now utterly useless. So, how do I get back on track to regain some credibility? Well to do so, I will divulge some of the ATOs concerns with SMSF compliance. As mentioned above, 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 of 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 supposes that the amount of funds being reported as contravening the SIS Act 1993 is askew from reality, and that the number of non-compliance is greater. How does this then link to my hypothesis of reasoning given for wanting an SMSF, being a perception?
Well, it is reflected in the actions of the regulator, in reaction to what is showing up and to their perceived concerns. The underlying problem is the choice to setup the fund in the first place, bereft of fully understanding the responsibilities that encompass being a trustee. Along with this, the misunderstanding of the limitations that accompany an SMSF, means that some trustees are making misinformed decisions, even before they become a trustee. I am not saying this is evident in relation to the majority of funds, but it is showing up in the minority. 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?
Disclaimer: This editorial provides general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your particularly investment objectives, financial situation and individual needs. Charter Financial Planning and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this editorial. Charter Financial Planning Limited ABN 35 002 976 294 AFSL Licence No. 234665. Principal Address 750 Collins Street GPO Box 2830AA Melbourne VIC 3000.