This article was published in the September 2013 edition of SMSF Adviser magazine.

Introduction

Australian Taxation Office statistics show that as at March 2013 assets held in self-managed superannuation funds (SMSFs) had a combined value of approx. $496,204,000,000.  These assets are spread (not evenly) across approximately 500,000 funds – and the quantum of assets and number of funds continues to rise.1  It seems that everyone is ‘getting in on the act’.  But are superannuants entering the self-managed space with “eyes wide shut”?

Preliminary questions

There are the threshold questions that remain relevant for everyone thinking of looking at a fund.  These are reasonably well known and include:

  • Do you have the time to run a fund?
  • Do you have the knowledge – legal and financial - to run a fund?
  • Do you have sufficient superannuation savings to justify your own fund?

Other questions for a client’s consideration include:

  • Are you aware of the benefits you will lose if you roll present superannuation savings into a self-managed fund? 
  • Have you looked at any of the on-line trustee “courses”? 
  • Do you realise that if any of the fund’s investments are lost through fraud, you will not automatically be covered for compensation?

If a client answers ‘no’ to any of these questions, then the client in all likelihood has not properly thought through the decision to start its own SMSF.  Of course, if the client’s sole motivation for starting up the fund is to buy property, then that is another very bad sign.

And why do we care?

Most people with even a limited knowledge of superannuation will know that there is a concessional taxation regime applicable to self-managed superannuation funds.  This system is “apparently” designed:

  • to encourage and provide for prudent management of regulated superannuation funds;
  • to encourage members of the community to provide for their retirement by taxing funds managed appropriately on a concessional basis; and
  • to ensure that superannuation assets are available to support fund members in their retirement (or other times when access to those assets is otherwise permitted) rather than being used for unauthorised purposes.2

Put another way: tax becomes a very, very significant issue where there is non-compliance.

If the Commissioner of Taxation makes a fund non-complying, not only is the concessional treatment lost to the fund while ever the fund remains non-complying.  From the relevant year of income onwards (until again compliant) the fund is taxed at 45% and “additional income” will similarly be taxed at 45%.

In plain English: if it all goes horribly wrong, even if making a fund non-compliant will result in a tax debt so burdensome that the fund may not be able to pay it, the Commissioner is under no obligation to refrain from issuing that notice and will issue that notice if, taking everything into consideration, the Commissioner believes it to be appropriate.3

Along the same lines, there can be significant tax pain even in the absence of a non-compliance notice.  For example, where moneys are released from a fund but a payment standard as prescribed by the superannuation legislation has not been met, the moneys released are taxable in the hands of the recipient at marginal rates.4  Further, if that amount is not disclosed by the recipient for taxation purposes, a base penalty amount of 75% of the shortfall can be imposed on the taxpayer for that non-disclosure.5

Conclusion

There is presently ample encouragement and temptation for superannuants to use a self-managed fund for their superannuation savings.  This self-managed option will work well for some, but it is not for everyone.  It needs to be borne in mind that the self-managed system is viewed by the courts as “a privilege” and the system itself includes mechanisms to “encourage” compliance.  In short, the Government giveth and the Government taketh away – and in any one instance it takes a whole lot more than it would ever have given if a fund trustee gets it wrong.