The viability of an SMSF for your client

Preliminary questions

There are 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 – both 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 online 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 their 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.

Why should you care?

Most people with even a limited knowledge of superannuation will know there is a concessional taxation regime applicable to self-managed superannuation funds. According to The Trustee for the R Ali Superannuation Fund and Commissioner of Taxation [2012] AATA 44 (30 January 2012) at para 9, this system is designed:

(a) to encourage and provide for prudent management of regulated superannuation funds;

(b) to encourage members of the community to provide for their retirement by taxing funds managed appropriately on a concessional basis; and

(c) 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.

Put another way: tax becomes a 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 the fund remains non-complying, from the relevant year of income onwards (until again compliant) the fund is taxed at 45 per cent and “additional income” will similarly be taxed at 45 per cent.

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.

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

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.

Kathleen Conroy is a partner at Gadens Lawyers