Australia’s DIY super fund sector has emerged as the most powerful sector in the superannuation industry.
As at 30 June 2008, self-managed super funds (SMSFs), as DIY super funds are officially known, controlled $358 billion of the $1.17 trillion held in super assets in Australia.
Remarkably, this massive amount of money is controlled by less than 4% of Australia’s population. Today, Australia’s 750,000 or so DIY super investors manage assets that are worth more than all the money held in 10 million industry super fund accounts, and worth more than all the money held in millions of retail super fund accounts.
Since 1996, the number of DIY super funds has nearly quadrupled — from around 100,000 DIY funds in 1996, to nearly 400,000 funds in 2009. The self-managed super fund (SMSF) market has grown steadily with the growth in the number of new SMSFs spiking immediately after the super changes (delivering tax-free super for over-60s) were announced in May 2006. Nearly 9000 new funds were set up in June 2006 quarter and a unprecedented 43,000-odd new SMSFs established during the 2007 financial year (more than double the number established in the 2006 year).
Expect penalties for bad behaviour
The message is clear: SMSF trustees can expect greater attention from the regulator and from Government. A powerful example of this attention is when the trustees of a self-managed super fund found themselves in front of a Federal Court judge.
The trustees for the Axent Group SMSF had sold an industrial property belonging to the SMSF and then hit financial trouble in their business. Instead of retaining the proceeds of the property sale within the SMSF, they used the cash to pay off a business debt.
In October 2007, the Federal Court determined that the trustees of the Axent Group self-managed super fund had breached the super rules and are now liable to pay $30,000 in penalties plus $32,500 in costs – a whopping $62,500. In fact they were fortunate. The maximum penalty for breaches of this kind can be up to $220,000 before costs.
The members/trustees of the Axent Group SMSF had not satisfied a condition of release, such as retiring or turning 65 or starting a transition-to-retirement pension (TRIP). By withdrawing the cash without satisfying a condition of release, the trustees, a Queensland couple, had broken the rules and got caught.
According to the tax office, this court action is part of increased compliance activity directed towards SMSFs. Misbehaving SMSFs are at risk of prosecution, penalties and additional tax.
Mercy, mercy
There is some good news from the tax office. Due to the number of changes in super recently, the taxman has shown some mercy for breaches of the super rules where the breach involves a new SMSF obligation.
For the period from July 1, 2007, until June 30, 2008, the ATO did not impose penalties or other regulatory sanctions for non-compliance of certain obligations if it considered the trustees have made a genuine attempt to comply with the rules. This “mercy” policy applied to the following breaches during the 2007-08 year:
- Mistakes because of changes to Member Contributions Statement reporting.
- Failure to notify new trustee appointments or removal of trustees.
- Non-compliance with trustee declaration. Effective from July 1, 2007, all new trustees of self managed superannuation funds including new trustees of pre-existing SMSFs must sign a trustee declaration within 21 days of becoming a trustee and retain the document with their fund’s records. The declaration must be available for inspection by the ATO or the fund’s auditor when required.
For the 2008-09 year, the ATO’s mercy continues but in a limited form. If your fund makes a genuine mistake in your fund’s annual return for that financial year then the ATO will not impose financial penalties or other sanctions.
The ATO has warned that one of the ATO’s concerns is that new or recent registrants may not be aware of, or understand their obligations.
The ATO has even predicted that because of the tax benefits associated with superannuation, the SMSF structure will become the primary vehicle for intergenerational tax planning. The senior decision-makers at the ATO anticipate that changes will occur in SMSF investment strategies reflecting this long-term outlook.
The ATO is concerned that the massive growth in SMSFs will make DIY super trustees targets for ill-suited investment products. The ATO warns that trustees of self-managed super funds must accept responsibility for their investment choices and the associated risk, and consider such things as diversification and cash flow.
In “recognition of the growing size of the self-managed fund market and the increasing value of investments”, the tax office now has 250 compliance staff, in addition to extra staffing for late lodgement cases. The office reviewed 10,000 cases during 2007-08 as part of its compliance program, and is reviewing a similar number of funds during 2008-09.
Understand your SMSF responsibilities
You may be thinking that 10,000 reviews from a total of 370,000 or so SMSFs is a hit or miss affair, but the SMSFs for review are selected using a risk-based selection process. During 2007-08, a third of the 10,000 cases were focused on new SMSFs, and another third of SMSF cases were selected on the basis of contravention reports provided by SMSF auditors.
The remaining one-third of cases were selected on the basis of identifying cases where SMSFs have not met their regulatory obligations, for example, breached the in-house asset rules, borrowed money, contravened the sole purpose test or lent money to fund members or related parties (I explain these rules in Section C of the Q and As).
A new development that is likely to affect thousands of SMSFs is the introduction of administrative penalties for late returns, effective from the 2007/08 year. If you lodge your return outside the specified lodgement dates then your fund will be hit with a late return penalty.
The tax office is also checking up that the returns are complete and accurate. If you’re unwise enough to make a false or misleading statement in your fund’s annual return or in any other approved form required by the tax office, then expect to be hit with a penalty. The tax office can impose a penalty on an SMSF trustee if the trustee makes a statement to a tax official, or omits facts from the statement and the statement is misleading in a “material particular” because of the omission.
According to the ATO, it will only accept as a defence where the SMSF trustee did not know and could not reasonably be expected to have known that the statement was false and misleading.
Fortunately, most SMSF trustees don’t have to worry about unfriendly attention from the ATO because they ensure they keep up to date with the super rules by reading books like DEAR TRISH… DIY SUPER: 101 Q and As.
This book of Q and As is an easy-to-use refresher of your SMSF trustee obligations, including rules relating to investing your super monies. You will also find answers to some of the more practical issues that you may face as an SMSF trustee.
A valuable SMSF resource
Not surprisingly, considering the spectacular growth in SMSFs, I have received thousands of questions from DIY super fund trustees hungry for clear, accurate and independent information about running a DIY super fund. DEAR TRISH… DIY SUPER: 101 Q and As is a compilation of the most popular and most important questions asked by readers of my ‘Dear Trish’ column, which appeared in online investment publication, Alan Kohler’s Eureka Report.
This unique book is a valuable stand-alone reference for every DIY super trustee, or a companion resource to my earlier book, DEAR TRISH…SUPER: Tax-free Superannuation Dollars For You.
I no longer write the Dear Trish column which means this book, and my website, www.superguide.com.au are the main sources of independent information on DIY super in Australia.
I trust you will find this resource useful.
This article is an edited extract from the introduction of Trish Power’s book DEAR TRISH… DIY SUPER: Q and As (Wilkinson Publishing) ($29.95)
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