Wednesday, 30 April 2014

Great article must read Five reasons why you must take control of your SMSF

Five reasons why you must take control of your SMSF

Bina Brown
Photo: BloombergWith so many do-it-yourselfers now at the controls of their retirement funds, the predators are circling.

The 500,000 self-managed superannuation funds (SMSFs) now controlling more than $500 billion in assets need to keep their wits about them if they are to hang on to their savings.
The government will soon be joining the scammers as a potential re­cipient of investor funds when it introduces a new penalty regime capable of reaping ­millions of dollars.
But far less clear than the government’s revenue-collection methods are the myriad schemes to fall for and mistakes to be made by unwitting trustees of do-it-yourself funds.
More from Smart Investor: 
• How SuperStream will affect your SMSF
• New SMSF fines from $850
• How your SMSF can avoid a $17,000 fine
High on the list of concerns among the industry and its regulators are property spruikers, misleading advertising around the cost of setting up an SMSF and the potential returns, getting the right advice on how to structure and use SMSF funds, and people accessing retirement savings early.
“One of the dangers of self-managed super funds is the liberty trustees are given. They are in charge and responsible,” says DBA Lawyers director Daniel Butler.
“We have seen people going through tough times getting a job, putting food on the table, paying the school fees and they are in control of the super fund bank account,” he adds.
“They go into the bank account and help themselves. There is no one to slap them on the wrist and there is no bureaucracy to go through to get it. They just help themselves, but it is years down the track that it often catches up with them.”
Large sums of money sitting in bank accounts are always going to be a temptation and the bigger the SMSF sector gets, the more attention it attracts from unscrupulous or misinformed operators.

Sounding the alarm

“History would suggest that as the value of the sector grows, there is the potential for scamsters to target the area,” says Greg Tanzer, of the Australian Securities and Investments Commission (ASIC).
“That is why we were keen to get out early on property spruiking and making it clear that SMSFs should not be the next target because superannuation is too important for that.”
Tanzer says the regulator’s attack on the advice given to SMSFs investing in property is for two reasons – not only can the advice be misleading but some advisers are not licensed to give it.
“If you promote property as an investment for self-managed super funds or you encourage people to set up an SMSF so they can invest in property – even though it is not a financial product – we regard that as financial advice for which you need a licence,” he cautions.
“ASIC is aware that there has been a sharp rise in promoters recommending investors either set up or use an existing SMSF to invest in property. These promoters may not be complying with the law,” he says.
ASIC continues to pursue two Queensland self-managed super advice firms, Royale Capital and ActiveSuper, which raised $4.75 million from more than 350 investors to invest in distressed real estate in the United States.

Short on protection

It’s worth remembering that SMSF members generally take responsibility for their own retirement income outcomes.
Members don’t have to seek professional advice but when it comes to being compensated for bad decision-making, there is a good chance they will have to wear it.
And they can’t count on compensation where fraud or theft has occurred – it’s not as straightforward as it is with members of public offer funds.
Andrea Slattery, chief executive of the SMSF Professionals’ Association of Australia, says other legal avenues that SMSFs can pursue include personal indemnity schemes, actions under the corporations law, action in the courts on compensation for damages, the financial ombudsman and banking and credit law.
If an investor suffers financial loss due to fraudulent conduct, theft or inappropriate advice by their adviser, there may be access to the adviser’s external dispute resolution scheme – provided the adviser maintains their membership.
If disagreements arise about how the SMSF is managed, it is up to SMSF members to sort these issues out between themselves or seek potentially costly legal advice.
We have identified five key areas where trustees can take action to protect their investments:

New penalty regime

If paying fines to the Australian Tax Office seems like a waste of money, the best way to avoid them is to comply with its rules.
From July 1, the ATO will operate under a new penalty regime and trustees should be prepared for some muscle flexing, says Brian Hor, special counsel (estate planning and superannuation) at Townsends ­Business & Corporate Lawyers.
Previously the ATO had the option of declaring the fund non-compliant or going to court to impose a penalty. The new “speeding fines” are in between the old “do nothing” or “big stick” approach, Hor says.
Townsends estimates that if last year’s 19,823 separate contraventions are anything to go by, trustees could be up for $150 million in fines in the next financial year.
The upper limit of $10,200 applies to breaches of lending or providing financial assistance to members and their relatives, breach of in-house asset rules, borrowing by the fund (except as permitted) and failure to notify the ATO of an event that has a significant adverse effect on the fund’s finances.
The proposed fines will start at $850 for simple breaches, including failure to comply with ATO education directives and failing to provide the regulator with information on the correct form on time.
Other fines of between $1700 and $3400 will apply to breaches such as failure to prepare financial statements, failure to keep fund records for at least 10 years and failure to notify the ATO of any SMSF change of status.
Worse, Hor says, the penalties will apply to each fund trustee.
“It’s now even more important to think about changing from individual trustees to a corporate trustee, because each trustee can be liable to pay a fine of up to $10,200,” he says.
“That’s up to $40,800 for a four-member trustee fund.”
It’s also a wake-up call for all trustees to make sure they know what is going on.
This includes “where you have a single-member fund with two individual trustees – for example a son as single member of his fund asks his elderly mother to be the second trustee to make up the numbers,” Hor says.
“If the son then lends money to himself without his mother knowing, she could be personally liable for a fine of $10,200 for a breach that she had no knowledge of and did not benefit from.”

Property spruikers

The ability to borrow to invest in real estate, coupled with the rise in property prices, has sparked additional interest in the sector from buyers and sellers alike.
But the recent collapse of Charterhill Group, an accountancy firm that specialised in property investment through SMSFs, should ring an alarm for investors and SMSF trustees.
Although its demise may have affected only about 170 investors and caused losses of $7 billion, the business structure is well known and there are likely to be similar operators.
Generally, these are structures that benefit the promoter, not the investor. They either cold-call potential investors or hold enticing seminars where there is pressure to sign up on the spot.
“Charterhill offered a one-stop shop: a property research centre, a sourcing company, a property development company, an SMSF formation and administration service and a loan-originating service sourcing finance for SMSFs,” says SMSF Survival Centre founder Max Newnham.
“Where a group provides investment advice as to what people should invest in, research on what are the best investments to buy, assists in providing loans so that investments can be bought and also develops and manages the investments, it is hard to imagine how there cannot be a conflict of interest at some point.”
He says Charterhill put forward four reasons why it was better to buy a property with borrowings in an SMSF rather than negatively gearing it personally.
These included: members being able to reduce the SMSF loan by making concessional deductible contributions; members leveraging the amount they contribute to super by buying a larger growth asset for a more comfortable retirement; members being able to buy a home now through an SMSF that they want to live in when they retire; and the loss created due to interest and depreciation reducing the income tax on the compulsory employer and salary-sacrifice contributions.
“The sole purpose of super is to provide retirement benefits,” says Newnham. “It is not to provide a source of funding for people to invest in property.
“By setting up an SMSF to buy property, the fund does not meet this sole-purpose test. It is surprising that the auditors of the SMSFs set up by Charterhill regarded them as complying super funds.”
Newnham says the fourth reason given on income tax makes no sense.
“Where a person has sufficient cash flow to fund the rental loss and obtain a tax deduction at 20.5 per cent [the lowest tax rate, including the Medicare levy, paid by an individual],” he says.
“It’s more tax-effective than reducing the 15 per cent tax payable on super contributions.”
BFG Financial Services managing director Suzanne Haddan says any investment where the accountant, solicitor, financial adviser and mortgage broker are on hand should ring alarm bells for investors.

The right structure

If cost is the reason for setting up an SMSF with individual trustees rather than a corporate trustee, it may be worth reconsidering.
Individual trustees may be cheaper but given the reality of illness, death and divorce, a corporate trustee can simplify a situation and be cost-effective in the long run, Haddan says.
“If it is a two-member fund and someone dies, it can be a hassle admitting a new trustee just to keep the fund compliant. An SMSF can’t have a single trustee unless it is a corporate trustee,” she adds.
How it works is the corporate trustee acts as the SMSF trustee. The fund members are directors of the trustee company but if one person becomes ill, dies or is to leave the fund, the corporate trustee retains control.
According to ATO data, three-quarters of SMSFs have an individual trustee structure. The preference has been attributed to the increased costs and compliance burden associated with a corporate trustee structure.
In addition to complying with the company’s constitution, a corporate trustee must also comply with the Corporations Act. An extra cost is also in the establishment of a company, which could be up to $1000.
DBA Lawyers’ Daniel Butler suggests going a step further with a sole-purpose corporate trustee rather than a company which carries on extra activities.
“The upfront cost of establishing the company generally results in long-term benefits that far outweigh the upfront cost as significant cost and administrative effort is involved in any future change of trustee,” Butler says.
Among the benefits of having a corporate trustee is the limited liability for directors, simpler segregation of SMSF assets, administration efficiencies for changes in members and simpler trustee succession.
From an administration perspective, when a new individual member joins or leaves a fund they must also become or cease to be an individual trustee.
As trust assets must be held in all trustees’ names, the title to all assets must also be transferred to the new trustees.
In the case of a corporate trustee, on the admission or cessation of membership that person becomes or ceases to be a director of the company. Thus, the title to all assets remains in the company’s name.
Butler says a sole-purpose corporate trustee also helps to keep things separate.
“If the same person runs, say, a building company which is also the trustee of the super fund, there is every chance that money could flow from one to the other and there could be a loan issue or that person could be sued and the super fund assets put at risk of becoming embroiled in a legal stoush,” Butler says.
“We see the sole-purpose corporate trustee as an insurance policy against future risk.”

Misleading advertisements

Clever ads are written in the hope of capturing someone’s attention and their business, but it is often up to individuals to use their nonsense detector or recognise whether the advice they are being given is financial.
Misleading or deceptive statements within the SMSF space is an area ASIC has been paying particular attention to.
It points to regulatory action against Media Super, SMSF Property Capital and SuperHelp Australia as areas where it is prepared to act.
Media Super was issued with an infringement notice after distributing a fact sheet which ASIC alleged inaccurately represented the costs and benefits of Media Super funds, compared with SMSFs.
Media Super published the ads as a fact-sheet titled “Self-managed super? You be the judge”, which compared the costs and benefits of SMSFs with the Media Super fund.
ASIC was concerned the fact-sheet inaccurately represented the relative costs and benefits of the Media Super funds.
SMSF Property Capital paid a $10,200 penalty in response to an infringement notice issued after making potentially misleading statements about “ASIC-approved” financial products.
SuperHelp was fined $10,200 after making potentially misleading statements about the cost of setting up an SMSF using SuperHelp’s administration services.
ASIC says the representations were that fund set-up was free and pension fund set-up was free, subject to conditions. But no conditions were disclosed in the advertisement.
The concern was that, although advertised as free, the conditions for fund set-up required investors to pay $475 upfront – half the annual administration fee – to qualify for “free” fund set-up.
There were also restrictions on the number of members a fund could have and the number of investments. ASIC was also concerned that pension fund set-up was not free for investors under 60.
ASIC’s warnings extend to any real estate agents recommending investors use SMSFs to invest in property. They must be appropriately licensed to provide the advice.
There have also been warnings to consumers about advertisements recommending the purchase of properties through government schemes such as the national rental affordability scheme (NRAS).
Specifically, there are concerns about ads claiming consumers can use their super to purchase a property using the NRAS and receive “$100,000 tax”.

Early release schemes

There are plenty of people facing hard times financially, but gaining early access to super benefits is generally seen as a last resort.
The government has a view on what constitutes severe financial hardship and you can ask a trustee to release a portion of your super provided certain conditions are met.
There are also operators claiming they can withdraw your super or move it to a self-managed fund so you can pay off your debts or access the money for your own needs.
In the past, this has meant that once your super is withdrawn or transferred they take a large commission or transfer the entire amount to their own accounts.
By agreeing to the transfer, not only are savings at risk but there may also be tax penalties.
In one case, Jane*, 35, was desperate to pay off a huge credit card debt and meet her mortgage payments. She knew there was $60,000 in her super fund.
As she wanted the money now, she replied to an ad in her local paper claiming she could get hold of her super money immediately.
John* answered her call and said all she needed to do was sign some papers to transfer the money into his SMSF. He said he would give Jane 90 per cent of the $60,000 and take a 10 per cent commission.
Jane signed the transfer papers and waited for the money to arrive. She then got a call from the ATO advising she was up for a tax bill as she had accessed her super.
She still didn’t have the super savings. A call from an ASIC investigator alerted her to complaints from other people who had also had transferred money to John’s SMSF.
She then learnt it was illegal to access super funds before she had retired and was questioned about her dealings with John.
She was eventually shown John’s fund bank statements which showed her money had been withdrawn and there was nothing left. John was already bankrupt so there was little hope Jane would get her money back.
Had Jane gone through the legal channels she may have met the conditions for release and still had the bulk of her savings.

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