Knowing when Super actions are illegal
AUSTRALIA'S 600,000 self-managed super funds (SMSFs) are collectively worth an estimated $755 billion.
That's nearly one-third of total super assets. But it seems not all SMSFs follow the road rules.
It's that time of year when many Australians will think about establishing their own super fund. SMSFs can have a lot going for them, however one of the big differences between running your own fund and a professionally managed super fund, is that each member of an SMSF is also a trustee.
That means every member is responsible for the way the fund is run. And it turns out that not all SMSFs meet the mark.
A recent speech by Dana Fleming, the Tax Office's Assistant Commissioner of Superannuation, identified some of the traps that SMSFs get caught up in.
One of the biggest pitfalls is using a SMSF to access super savings ahead of retirement. It's what the ATO calls 'illegal early release' (IER).
Apparently, several hundred newly established SMSFs have been caught out for IER this financial year. The main reasons for dipping into nest eggs prematurely were found to be financial stress or a desire to spend retirement savings on present-day benefits like funding a holiday or buying a home.
In other cases, SMSF trustees simply knew little or nothing about setting up or running an SMSF - the result of being targeted by unscrupulous promoters.
The other area of Tax Office focus is the non-lodgement of SMSF annual returns (SARs). Amazingly, 14% of SMSFs - that's nearly three out of 20 funds, don't lodge returns on time.
Falling behind with paperwork is like waving a red flag to the ATO bull. As Fleming noted, "Non-lodgment is a strong indicator that the retirement savings of SMSF members may be at risk". In other words, the fund could be up to something dodgy or isn't being suitably managed.
Establishing your own super fund can be exciting. It's an opportunity to control your retirement savings in much the same way you have control over other aspects of your financial well-being. But it brings a raft of responsibilities that cannot be delegated to your accountant, tax adviser or financial planner.
The bottom line is that as a member of a SMSF the buck stops with you. And the penalties for getting it wrong can be high, including the prospect of your fund losing its tax-friendly status.
This highlights the need to get good advice, weigh up the costs against the benefits, and seriously consider if you have the time, skills and interest to manage your retirement savings.
If you can't tick all these boxes, a professionally run fund may be a better option. And if you chose a top quality low cost fund, it will certainly be simpler, cheaper and with better performance than many SMSFs.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.