The mainstream press regularly writes of the complexities and pitfalls of running a self-managed superannuation fund (SMSF) and, frankly, we find it difficult to disagree. Indeed, the income tax and regulatory environment in which SMSFs operate can be quite convoluted.
As at 30 June 2016, 8,219 SMSFs (1.6% of the SMSF population) had tripped up on some aspect of superannuation law and had an auditor contravention report for the 2013-14 financial year reported to the ATO [1] for possible compliance action.
At the risk of sounding too obvious, we argue quite strongly that you're going to be much better off by not provoking the ATO into an audit of your SMSF's affairs by accidentally or deliberately breaking the law, so it's recommended that you be across all of the main points in the Trustee declaration you should have already signed and kept on file.
Whether you've been running an SMSF for many years, or you've only just established one more recently, we've included a list below of the five most important things that we believe will help you keep your SMSF on the straight-and-narrow now and into the future.
[Continue to] understand your duties and responsibilities in your role as a trustee
Although you're most likely employing a professional administrator to help you manage your SMSF, you cannot outsource your trustee responsibilities. These include, but are not limited to:
- Ensuring your trust deed is current and is reflective of current superannuation law
- Having an up-to-date investment strategy, and reviewing it annually. Did you also know that you need to consider insurance cover for the SMSF's members as a part of this annual review?
- Keeping meeting minutes and detailed financial records up-to-date
To maintain or improve your trustee knowledge, we highly recommend that you undertake a free on-line approved education course if you're feeling your knowledge is lacking in some areas.
Ensure that your personal money and assets are kept separate from the SMSF's
This is an important issue.
It's so easy to think … well, it's all our money anyway … but if you're thinking this, stop now as it's completely the wrong way to go about administering your SMSF's assets.
According to the ATO's 2015-16 annual report, 14% of all reported contraventions result from this one issue so it's important your SMSF's bank account and all fund assets are correctly recorded in the name of the fund.
You can't, for example, settle a transaction to buy shares in Telstra Corporation Ltd (ASX: TLS) with SMSF money through a personal bank account, even if the trade is being executed through a brokerage account in the SMSF's name.
The penalties for getting this wrong are $3,600 per trustee so if your assets are not recorded correctly in the name of the fund, make this your SMSF's new-year resolution to get this rectified immediately.
Appoint a corporate trustee
Leading on from the 'separation-of-assets' issue is the matter of whether to use your personal names as trustees for the fund, or to use a special-purpose company.
It's obviously cheaper to be an individual trustee, but having a special-purpose company clearly makes it easier to identify fund assets and helps you avoid mixing the SMSF's assets with those of your own.
The additional benefits though of using a company include:
- The title of SMSF assets won't need to change when members change (either due to retirement, bankruptcy, divorce, or death)
- If you contravene the law, the penalty impact of contraventions will be lower if you have a corporate trustee. This is because administrative penalties are applied on each trustee. Four individual trustees within the SMSF, for example, are therefore going to be much worse off than if you had a single company (with each member being a director)
If you're worried about the cost, you shouldn't be. The amount of administrative hassle you'll avoid in the future by having a special-purpose company is money well spent in our view.
If your SMSF owns a property, ensure you have a declaration of trust
According to ATO statistics, there's a decent number of SMSFs owning either residential or non-residential real property.
Unfortunately though, when it comes to the recording of an SMSF's ownership of property, the titles office for whichever state or territory you live in usually will only allow the trustee to be recorded as the owner (without reference to the SMSF).
For example, 'Mr A Jones and Mrs B Jones' will appear on the property's title, but not 'Mr A Jones and Mrs B Jones ATF Jones Superannuation Fund'.
The best thing to do is to obtain a declaration of trust. This is merely a statement by you that the property is being held for the benefit of another 'person' (the SMSF) and can be provided to the relevant titles office to include a caveat on the title deed.
This should provide strong creditor protection and ensure beyond doubt that the property in question is properly recorded as a fund asset.
If you're drawing an account-based pension, ensure you meet your minimum pension amount
If you're retired and drawing an income from your SMSF, you'll want to ensure your SMSF continues to attract a nil tax rate on earnings from those assets supporting the account-based pension.
You can jeopardise all of this though if you fail to pay a minimum amount each year to a member of the fund from their pension account within the SMSF.
For example, if you're under 65, but fully retired from gainful employment, you'll need to ensure you're paying at least 4% of the pension balance to yourself as a member.
Failure to do this will mean losing access to the exempt current pension income (ECPI) tax exemption in your annual return for that year and ultimately having to pay more tax than otherwise.
SMSFs and dividends
SMSFs remain a powerful wealth-building tool for anyone who can consider themselves engaged with the regulatory and taxation aspects to running an SMSF on one hand, and the investing process on the other.
Combining the SMSF structure then with the ability of trustees to choose fully-franked, tax-effective dividend paying shares within the SMSF is a powerful combination for the average investor, especially for those trustees who have owned Washington H. Soul Pattinson Ltd (ASX: SOL), Commonwealth Bank of Australia (ASX: CBA) or Wesfarmers Ltd (ASX: WES) shares over extended periods of time.
Continuing in that vein, we've also included a link below to our number 1 dividend pick for 2017 which we think will add meaningful returns to your SMSF in the years ahead.
Foolish takeaway
If you're a trustee with a quality portfolio of dividend paying shares, the last thing you want to do is risk all of this by failing to pay attention to the basics of running your SMSF.
The list above is a starting point and of course there's a whole lot more to running an SMSF than just the main points in the article. We therefore recommend you work closely with your paid advisors to ensure you're managing your SMSF in full compliance with the law.
The benefits of getting it right should hopefully mean a well-funded and dignified retirement for the average trustee.
[1] Commissioner of Taxation Annual Report 2015-16
