All posts in category SMSF Management

Ideas on how to run your SMSF properly

10 common mistakes made by many SMSF Trustees


I run regular sessions educating Trustees in small groups on how to utilise their SMSF and to avoid common mistakes so I thought I should share the more common ones. Self managed superannuation funds can be kept simple or they can involve very complex strategies. The superannuation system has many rules and regulations that members need to adhere to.  To ensure that you avoid the traps when it comes to self managed superannuation read on! Errors happen

1.    Jumping in too early with a low balance.

Unless you expect to make regular large contributions in the coming years or expect to put a large lump sum (e.g. inheritance) in soon, the administration fees of maintaining a Self Managed Superannuation Fund will erode away any profits and may also eat into your contributions.  The general agreed rule of thumb among honest SMSF professionals for a minimum balance for a Self Managed Superannuation Fund would be $200k. This would only be on the proviso you would be making contributions at or near your concessional cap depending on your age and that you may also be adding some non-concessional funds on a regular basis so that your fund has $400-$500K within 3-5 years.

If there are 2-4 members that are contributing to the fund with frequently largely sized contributions this can justify the use of a self managed superannuation fund earlier.  Just remember that generally it costs around $2,200.00 per annum in auditing, accounting, tax agents fees and ASIC fees for the fund as well as a general 1% investment fee.

2.    Failing to educate yourself first, before you open your fund so you know the basic SMSF rules.

Self managed superannuation funds can be very complex, if you do not know the basic rules of a fund and you are not using a fund administrator like an Accountant or a specialised service, you are asking for trouble! As the number of self managed superannuation funds increase rapidly the ATO as regulators will begin to take a stronger position.  Currently non compliant funds can lose up to 46.5% of the funds assets to tax plus fines for the Trustees!

There is jargon like concessional and non=concessional contributions and tax free and taxable components so take the time to understand them.

The main reasons of funds losing their compliance status is due to providing loans members. Anyone who has just started a self managed superannuation fund whether they have a manager or not that controls the funds should know the basic rules.

Here are some places to start:

ATO central access point for information on SMSFs  http://www.ato.gov.au/super/self-managed-super-funds/

The SMSF Association is pleased to provide you with this ATO SMSF Trustee online resource. ATO approved SMSF Trustee Education Program

By the end of this course, you will have learnt;

  • The basic facts about Superannuation and Self-Managed Superannuation Funds
  • How an SMSF works
  • The investment rules for SMSFs
  • The administration process to keep your SMSF healthy.

http://www.smsftrustee.com/ The Self Managed Superannuation Fund Trustee Education Program has been released by the Joint Accounting Bodies

We run regular seminars on educational topics for SMSF Trustees in groups of 6-10 people. Contact us for more details liam@verante.com.au 

 3.    Drawing on your SMSF for business or personal needs – Read and learn to stick by the Sole Purpose Test

Always remember it is your money but not yet! You are receiving generous tax concessions for providing for your retirement. Break the rules and you will lose those concessions! Self managed superannuation funds are not to be used to fund personal or business needs of the members of the fund or their relatives.  While many may be able to justify a small loan for a short period of time there is a total restriction on lending to members of the fund or related parties which may be extended family members or entities such as Family Trusts, Companies or partnerships.

Another example would be if you invested in a holiday resort unit managed independently by a management company and as part of the arrangement, you are entitled to private use of the apartment, 2 weeks per year. This arrangement would breach of the sole purpose test if used by your or any related party.

4.    Arranging for your SMSF to own your business premises without thinking the strategy through to the end

I actually love this strategy but there are positives and negatives to this situation and you will need guidance from your legal, accounting and SMSF Specialist Advisor. Many owners of small to medium enterprises use this as an effective strategy but others do a half-baked job and leave themselves exposed.

Pros:

  • Direct control of your super investments and a real understanding of where your money is invested.
  • The fund will pay only 15% tax on commercial rent paid
  • If the premises is sold no capital gains tax may be applicable once you are in pension phase and 15% or less if earlier.
  • You can be your own landlord with secured tenancy which allows you greater certainty when fitting out or installing equipment.
  • Keeps liquidity in the business to fund other costs.

Cons:

  • There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
  • If a member of the fund dies without the proper insurance in place the fund may have to pay out death benefits leading to a rushed sale of the commercial premises.
  • If sold to a third-party then there is a possible loss of tenancy to the business which could destroy it.
  • There are strategies that can be built to avoid the cons, it is best to speak to an advisor so that they can see what is best for your personal situation.

5.    Choosing the wrong type of Trustee for the job

 76% of funds in this country still have Individual Trustees or a Trading company as trustee when a Sole Purpose Corporate Trustee would be much more suitable for long-term planning.

With individuals as trustees you need to change the name on all investments if one person leaves (divorce, death, Incapacity to act) or you add a new member (bring in a child, business partner or second spouse!). The paperwork involved is time-consuming and expensive just when it usually most inconvenient.

Please see my previous blog on this subject for more detailed discussion on this topic https://smsfcoach.com.au/2012/08/09/trading-company-as-smsf-trustee-or-sole-purpose-smsf-trustee-company/

 

6.    Failing to plan for death or serious illness of a member

If the fund is run by a husband and wife or run predominantly by one member, if that member passes it could have devastating impact on the remaining member and the self managed superannuation fund.  Strategies should be put in place so that all members involved in the fund understand the rules and regulations as well as the funds investment strategy.

Effort should be made to ensure the “silent” member is aware of and has met the Accountant, Auditor, and Financial Advisor and is comfortable that they could deal with them in the event of needing them. What’s the use in having a city based advisor if your spouse does not feel comfortable driving into the CBD. Choose a local Advisor for your later years.

All shares should be properly Chess sponsored and all members should have access to account numbers and passwords.

Binding Death Nominations and Reversionary Pensions should be reviewed regularly to ensure they still meet your wishes. The idea of leaving 20% to a son or daughter may have been fine when the fund was doing well but is it still a good idea in 2017? Make sure you do not leave your spouse short!

7.     Rolling to a SMSF without maintaining or transferring Insurance First.

One of the most important factors is to undergo a review of current insurances and to have life insurance integrated into your self managed superannuation fund.  When transferring from retail, employer or industry superannuation fund look to get “Transfer Terms” from insurers to open a new policy in the name of the SMSF without extensive underwriting. DO NOT LEAVE THIS UNTIL AFTER YOU HAVE ROLLED OVER! Despite your own perception of your health and vigour, you may find it hard to find new cover on the same terms or any terms so preserve what you have. Often we keep a small balance in a retail or industry fund just to continue the insurances in there at the group or discounted rates available.

8.    Getting behind on paperwork

More than just filing statements, trustees are required to document every decision that is made whether this is to make an investment, take out insurance, or change bank accounts. This should come in the form of minutes with details regarding who made the decision, on what day and where the decision was made.

The record keeping requirements of an SMSF can be quite onerous and failing to meet them is an easy way to fall foul of the ATO. Business owners usually have enough paperwork as it is, so paying professionals who can look after your record keeping may make sense for you.

9.    Exceeding the contributions cap

The cap on concessional contributions has changed so often in the last decade that confusion reigns each year.

The cap on concessional contributions for 2018/19  is $25,000. The after tax contributions (non-concessional) is capped at $100,000 per annum

There are a number of ways members can get caught out and exceed the cap. For example,

  • if you are paying for life insurance held in another super fund, the insurance premium can be deemed as a contribution. This premium would then be levied at penalty tax rates.
  • If your employer made last year’s June Super contribution in July of this year.

We can show you strategies for a couple to get up to $800,000 to $1,200,000 into super in one year by using a mix of contributions and a holding account strategy.

10.  Not having a proper Cash Hub and losing interest and paying unnecessary fees

If you go to your normal bank to set up a bank account for your SMSF, they will most likely suggest that you use a business bank account. These accounts generally have high monthly fees, transaction fees and provide little to no interest.

We estimated the average cash balance of SMSFs to be between $50,000 and $80,000. Based on these figures, by using business bank accounts, trustees may be costing themselves approximately $3,000 per annum in fees and lost interest.

There are better options out there. Look at Macquarie’s Cash Management Account almost matching the RBA cash rate (noting for first $5K). Link these to an ING Direct Savings Maximiser for the Fund or a RaboDirect Notice Saver Account paying up to 1.8 to 2.35% higher for cash. Use 6, 9 and 12 month Term Deposits where funds are not needed short-term.

Make sure all accounts are opened correctly in the name of all trustees. Get it wrong and it can cost a lot to rectify.

I hope these thoughts  have been helpful and please take the time to comment if you know of others common mistakes as I know this is not an exhaustive list.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of  Viridian Advisory Pty Ltd (ABN 34 605 438 042) (AFSL 476223)

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

3 Comments
by SMSF Coach - Liam Shorte on October 20, 2011  •  Permalink
Posted in SMSF, SMSF Management, Superannuation, Trustee
Tagged , , , , , , , , , , , , , ,

Posted by SMSF Coach - Liam Shorte on October 20, 2011

https://smsfcoach.com.au/2011/10/20/10-common-mistakes-made-by-many-smsf-trustees/

Divorce in your 50’s or 60’s with an SMSF and/or Small Business to deal with?


Divorce in an SMSF

Can a Small Business or SMSF survive?

Mel Gibson & Robyn Moore separated after being married for nearly 3 decades, Brad Pitt and Angelina Jolie for just 12 years. Greg Norman and his first wife Laura were together for 25 years and now he is on to his 3rd marriage!

These long-married celebrity couples are far from alone and throughout Australian society this is becoming a common occurrence. Fewer married couples are making it to their 25th, 30th and 35th wedding anniversaries—even as life expectancies have increased.

We as Financial Advisers and the Divorce lawyers we work with are seeing a growing number of long-married couples call it quits. This is being termed “Grey divorce” or “Empty Nest Scenario”

As years go by, kids leave home, business demands grow and they get close to retirement age, where they will have to be near one another more, one of them usually realises they don’t want to live the rest of their life in this manner or they want to seek out new experiences like international travel, a tree change or seachange or just want to concentrate on themselves or their business.

A long-married couple that has done well financially must figure out how to divide investments, superannuation and other retirement savings, investment properties and businesses started by one spouse during the marriage. They must contend with a crazy quilt of regulations—some federal, some state and some set out by superannuation legislation.

Pulling apart all the entangled arrangements woven into a web over 20 or 30 years is difficult and stressful. But dividing a nest egg in a way that allows both spouses to retire without worry is crucial when there is little work time left to make up any shortfall.

Many of my clients are in their 50s and are getting divorced after two or three decades. But the strategy for one client can be totally different for another who is different only in age. The plan or strategy for a woman in her late 50’s who has not been in the work force for 30 years is totally different to the one for woman in her early forties with a recent employment history.

For older women negotiating a financial settlement as part of separation or divorce, that money has to last the rest of their lives. Even if they are employed, there’s usually a huge difference between the husband and wife’s remuneration packages.

Splitting up assets like shares, managed funds, bank accounts and insurance policies is relatively straightforward. But some of the largest family assets can be much trickier. Among them:

  • The house. This property holds memories of children, is close to friends and represents a lifetime of effort and a haven of comfort during a stressful time. If you owned your home you felt safer than when renting. As a result many wives seek to have the home included in their part of a settlement not realizing that they will fall into that Asset Rich – Cash Poor Trap. Rates and upkeep still need to be met while the remaining assets received in the settlement then need to work even harder to meet living costs.
  • The Superannuation Nest Egg. A couple’s biggest asset, aside from their house, is often the superannuation accounts and the majority of the time one account is far larger than the other. Superannuation accounts are by law in individual names, but they are still considered marital property if they were earned or acquired during the marriage. Dividing it fairly could mean the difference for a non working spouse between a secure retirement and a hand-to-mouth existence.

 Self Managed Superannuation Funds (SMSFs):

Many people think because they have a family SMSF and all the money is usually pooled together for investments, that all the money is owned jointly between the husband and wife. Time to refer back to the annual statements and look at the members reports which will reflect the true ownership of the funds as it is broken down between the members.

An SMSF with just a husband and wife members who are getting divorced will almost certainly involve one of the members moving to another fund. This may involve moving the current market value of the exiting member’s account balance as well as an agreed amount of their former spouse’s account balance.

These are two separate amounts and must be treated as such. These payments require totally different reporting requirements and also probably give rise to different income tax outcomes for the SMSF fund.

It is important to ensure that these super fund tax issues are sorted out with complete accuracy so that one member does not unfairly pay proportionately more tax than the other member.

 The latest Family Law provisions allow the parties to enter into an agreement at the time of marriage breakdown specifying how the superannuation interest is to be divided. However, no actual splitting occurs until a member’s benefit is paid.

The Superannuation Industry Supervision Regulations 1994 allows the benefit in most superannuation funds to be split at the time of the divorce. Therefore, two separate interests are in effect created – one for the member spouse, and one for the non-member spouse.

 A division of a superannuation interest may be initiated in one of three ways.

  •  The parties may prepare a Superannuation Agreement, which they lodge with the trustee (together with proof of marriage breakdown or separation).
  •  If both parties cannot agree on how the interest should be split, they must refer the matter to the Court. The Court will have the jurisdiction and the power to make an order about a superannuation interest that will bind the third-party superannuation trustee, or
  •  Parties will be able to make a ‘flagging’ agreement. It prevents the trustee from paying out any benefit to the member spouse without first asking the parties how they wish to split the benefit. Parties would need to enter into a ‘flag lifting agreement’ at a future date to terminate the ‘flagging agreement’ and provide for the division of the superannuation split. This would be used where the parties are close to retirement and would rather wait and see the exact benefit before determining how to split it.

Where an interest in an SMSF is subject to a payment split under the Family Law Legislation Amendment (Superannuation) Act 2001:

Specified benefit components will be split on a proportionate basis to the overall split.

Any capital gains or losses that arise from the creation or foregoing of rights when spouses enter into binding superannuation agreements, or where an agreement comes to an end, will be disregarded.

When dividing up the assets in an SMSF we try to have an agreement to ensure that the spouse with lower income from employment receives the highest proportion of their member benefits as liquid assets or blue chip shares rather than property or illiquid investments. Often we can look at setting up Transition to Retirement Pensions to access tax effective cash flow from 55 onwards.

 The Family Business:

Mid- to late-life divorce can cripple a business started during the marriage and owned by one spouse, because the other spouse is generally entitled to a share. Tax planning measures taken during good times to be able to distribute earnings across the family may now result in the business being torn apart as each spouse seeks to extract their equity in the business. Without careful planning, the business might have to be sold to comply with those terms or the business principal may have to take on excessive debt in their late 50’s to payout the former spouse.

We recommend that couples with a small business—especially those with children—enter into a “post-nuptial” binding financial agreement that spells out what happens to the business in the event of death and divorce. Such agreements, which need to be prepared by a solicitor well versed in Business and Family Law, are recognized in most states, are increasingly being used in estate planning, particularly for people in second marriages.

 Summary:

  • Divorce later in life means you have to ensure you cover yourself for lifetime expenses
  •  See the maximum liquidity and flexibility in dividing assets especially from an SMSF where there is flexibility.
  •  Serious financial consideration should be made before fighting to hold on to the family home as it could become a burden you cannot afford.
  •  Small Business owners must plan in advance for the handling of divorce or death of a business partner.
  •  You need an Accountant, Financial Adviser and Lawyer used to dealing with Business as well as Family Law.

I hope this is useful information for you and we always welcome new client enquiries. Would love some feedback.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

4 Comments
by SMSF Coach - Liam Shorte on August 12, 2011  •  Permalink
Posted in Divorce, Financial Planning, SMSF, SMSF Management, Superannuation
Tagged , , , , , , , , , , , , , ,

Posted by SMSF Coach - Liam Shorte on August 12, 2011

https://smsfcoach.com.au/2011/08/12/divorce-in-your-50s-or-60s-with-an-smsf-andor-small-business-to-deal-with/

Future Service Benefits Deduction a more practical alternative to the Anti-Detriment tax deduction for SMSFs and another example of where SMSFs may lead to better outcomes.


I hit a real low when I hear a client is Permanently Disabled or Terminally ill and I am sure that is the same with most of you too but in our field of work it is a matter of when not if we have to deal with such a situation. My reaction is to always want to make the best of the situation from my point of view and add as much benefit and make life as good for that client as possible.

I have always looked at the anti-detriment deduction (no longer available for deaths after 30 June 2017) and wished there was something I could do for the client while living as well as helping their family afterwards.    (more…)

7 Comments
by SMSF Coach - Liam Shorte on June 22, 2011  •  Permalink
Posted in Estate Planning, Insurance Strategies, SMSF Management, Tax Planning

Posted by SMSF Coach - Liam Shorte on June 22, 2011

https://smsfcoach.com.au/2011/06/22/future-service-benefits-deduction-a-more-practical-alternative-to-the-anti-detriment-tax-deduction-for-smsfs-and-another-example-of-where-smsfs-may-lead-to-better-outcomes/

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