SMSF basics: Joining the DIY super club

Note: This article contains the latest data available as at March 2011 (for data up to December 2010). We expect the ATO to release further data in May 2011.

Australia’s DIY super fund sector has emerged as the most financially powerful sector in the superannuation industry.

As at 31 December 2010, self-managed super funds (SMSFs), as DIY super funds are officially known, controlled $421 billion of the $1.32 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 840,000 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 more than quadrupled — from around 100,000 DIY funds in 1996, to 440,000 SMSFs by the end of 2010. The 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. An unprecedented 43,000-odd new SMSFs were established during the 2007 financial year (more than double the number established in the 2006 year).

Expect penalties for bad behaviour

Having such substantial financial power means that SMSF trustees also have to take very seriously the responsibility to follow the super rules. The message is clear: SMSF trustees can now expect greater attention from the regulator and from Government. A relatively recent example of this attention is when the trustees of a SMSF 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 were 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 was part of increased compliance activity directed towards SMSFs. Misbehaving SMSFs are at risk of prosecution, penalties and additional tax.

Beginner SMSF trustees beware

In the past, 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 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 SMSFs must accept responsibility for their investment choices and the associated risk, and consider such things as diversification and cash flow.

Note that SMSF trustees are subject to administrative penalties for late returns. If you lodge your SMSF return outside the specified lodgement dates then your fund will be hit with a late return penalty.

The tax office checks that SMSF 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.

A valuable SMSF resource

Not surprisingly, considering the spectacular growth in SMSFs, I have received thousands of questions from SMSF 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.

I no longer write the Dear Trish column which means my books, and the SuperGuide website, www.superguide.com.au are the main sources of independent information on DIY super in Australia.

I trust you will find these resources useful.

This article is an edited and updated extract from the introduction of Trish Power’s book DEAR TRISH… DIY SUPER: Q and As (Wilkinson Publishing) ($29.95)

See also

• SMSF basics: Wrap vs DIY super
• SMSF basics: Can my DIY super fund borrow money?
• SMSF basics: Is there a minimum or maximum age for starting a DIY super fund? (2 questions)
• Looking for a DIY super club? Join the AIA
• SMSF basics: Trish’s 10 commandments of DIY super

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