4 common SMSF mistakes and how to avoid them
Running a self-managed super fund (SMSF) can be complex and time-consuming, especially given the raft of regulations that apply to SMSF funds.
It can also be easy to make a mistake when administering the fund. So it pays to be aware of some of the common slip-ups SMSF investors make and what to do if you do inadvertently make an error with your fund.
1. Never use funds in the trust for personal reasons
Jordan George is the senior manager, technical and policy, the SMSF Association. He says the number one mistake people make with their SMSF is that they use the funds for personal or business needs by mistake.
“People draw money out of their SMSF accounts and use it for either a personal expense or a business expense or to help someone in their family, often without realising they're taking that money from their self-managed super fund,” says George.
“To make sure you don't do that have clear separation between your self-managed super fund bank account and your personal or business bank account. It's quite a serious contravention but most people do this by mistake. The ATO is far more lenient if people attempt to fix the mistake by themselves, putting the money back into the fund to undo the transaction,” he adds.
2. Always ensure investments are in the name of the trustee
According to George the second common mistake is people not having their investments in the right name.
“Make sure SMSF investments are not mixed with your personal investments. A requirement of superannuation law is that the assets of a fund must be in the name of the trustee, not the name of a member. If you're well organised you shouldn't make that mistake,” he says.
3. Ensure you pay the right amount of pension
George says underpaying pensions can be a problem for SMSF members who are in the retirement phase, given that a set percentage of the funds within the SMSF must be paid out as a pension, if members are in the retirement phase. Normally members must be paid a pension of four per cent of the value of the fund each year.
“There are strict pension rules you must follow if you're paying a pension from your SMSF and you want that all important tax-free treatment of the underlying assets. Income earned by assets is tax-free in the retirement phase. But if you don't maintain your pension properly, you risk losing that benefit and will then have to pay tax on those earnings within the fund.”
There are ways to fix this mistake. George says if you have made a very small underpayment, less than one-twelfth of the total minimum that you needed paid out, the ATO will look the other way and allow you to make a catch up payment.
“But prevention is better than the cure. So know the minimum amount you need to be paying from a pension at the beginning of the financial year and make sure you've scheduled payments well in advance of 30 June to make sure you reach that minimum to get tax-free treatment for pension assets.”
4. Stay within the in-house asset rules
In-house asset rules state that super funds can only invest up to five per cent of the total funds under management in certain investments involving related parties. Related parties are members of the fund, relatives of members or companies or trusts connected with the fund. George says it’s very easy to fall foul of these rules if the valuation of assets changes throughout the year.
“In volatile markets it's easy for the in-house asset investments you have to go over the five per cent mark. If that happens you need to show the ATO you have a strategy to bring that investment back down to five per cent within the next income year,” says George.
“Again, it's one that requires some planning and also monitoring of your fund on an ongoing basis to make sure that as the values of your investments change, you have a good idea of whether you're getting close to that in house asset five per cent rule or not,” he adds.