Weigh up the risks of SMSF structure, experts warn
With the dramatic rise in penalty fees for SMSF trustees who may fall foul of the ATO, the way in which a self-managed fund is established should be considered very carefully.
Since 2017, penalties for compliance breaches have risen nearly 75 per cent and trustees could face fines of up $18,500, said Daniel Butler, director of DBA Lawyers.
And if an SMSF is established under an individual trustee structure, that impost falls on the individual trustee or trustees.
“A lot of people go into setting up an SMSF and see the extra cost that establishing it under a corporate structure can entail,” Mr Butler said.
“But setting up an SMSF under a corporate structure provides the fund and trustees with limited liability, succession and other substantial advantages.
“Advisers may not be doing the right thing by their clients by setting up an SMSF under an individual trustee structure.”
Graeme Colley, executive manager, SMSF Technical and Private Wealth for SuperConcepts, said although the harshest penalties which are now in place are unlikely to be imposed regularly, an individual trustee structure still exposes SMSF members to risk.
“The complications arise generally when things are down, like with the death of an individual,” he said.
Mr Butler said his general rule is to recommend that people looking to set up an SMSF do so under a corporate structure to avoid the possibility of having to bear the brunt of any penalties that may be handed down.
“Some people when they set up an SMSF get in a family member or a friend,” he said.
“They have that as a basis of saving money but if you get pinged you get hit up really badly – up to an $18,500 penalty
“In the current economic environment how many other people can put up their fees 74 per cent in six years?
“This type of advice does not fall under the QAR measures, and I hate to say it, but I think it is purely a revenue raising process when you look at the increases in penalties we are seeing.
“I prefer everyone to have a corporate trustee. Individual structures create problems, for example, what if dad dies and mum brings on board a new spouse or child into the SMSF? It means there has to be new bank accounts, new records, changing the name of everything and it becomes clunky.
“Even moving from an individual structure to a corporate structure brings up all these problems, so it’s best to do it right from the beginning.”
Mr Colley said having to go through the changes required in an individual structured SMSF is not only complicated for members who tend to be older, but usually happens at times of great uncertainty and stress.
“You’ve got to be practical and certainly having to go through the process of changing names and setting up an SMSF again after a change in trustees is a logistical problem,” he said.
“The ATO does give a six-month timeframe to do all of these but for many people, especially with the passing of a loved one – six months is not a long time and having to think about your SMSF can be too much.”
