In a speech given earlier this month, ATO assistant commissioner Dana Fleming highlighted seven key mistakes SMSF trustees make when establishing their funds.
Ms Fleming said that common errors include inaccurate registration; failing to meet sole-purpose testing; prohibited loans; lending, leasing or investing more than 5 per cent of in-house assets; separating assets; borrowing money and administration issues.
In her speech, Ms. Fleming said the two most common mistakes made during the registration phase are: failure to properly establish the SMSF trust before applying for an ABN and the omission of member, trustee or director details.
Another area where trustees are experiencing problems is around sole-purpose testing. Ms. Fleming emphasised that any investment that issues current-day benefits to members or parties related to the fund violates the sole-purpose test.
SMSF trustees have also been found to breach rules barring the loaning of fund monies or assets to members of the SMSF or their relatives, while others lent, invested or leased more than the allowed 5 per cent of the fund’s total assets to related parties of the SMSF. In fact, some failed to ensure bank accounts and other such assets where actually held in the fund’s name.
Trustees were also discovered to have borrowed money, despite this being prohibited, and a number struggled in administrative areas. This included mistakes in drafting and updating the trust deed, an inability to maintain the investment strategy or meet lodgement obligations, not possessing a valid bank account or electronic service address, and failing to manage the annual audit process.
Such mistakes reflect relevant findings, with ASIC’s report 576 Member Experiences with Self-Managed Superannuation Funds, released in June this year, uncovering many members lack a basic understanding of their SMSF and their legal requirements as trustees.
Despite most respondents opting to set up SMSF accounts in order to gain control of their investments and superannuation, many admitted to relying on “financial experts” to file their paperwork, offer advice on investments and control the day-to-day running of their SMSFs.
This is particularly perplexing, as it was also found that some surveyed members did not check the credentials of their trusted “financial experts” and relied heavily on “gut feel” or the personal recommendation of a family member, friend or colleague when choosing financial advice.
In spite of such lack of understanding, there were more than 1.1 million SMSF members by March 2018, accounting for 595,840 accounts. This is up from 1.07 million members as of June 2016.
In light of this, the ATO has again asserted the importance of ensuring the fund is set up correctly. This is necessary to ensure the trustee is eligible for tax concessions, can receive contributions and can easily manage the fund’s operations.