An SMSF can be a very powerful retirement savings vehicle. It’s good for long-term wealth accumulation and asset protection within a tax-effective structure. There is plenty of scope, however, to lose your footing over some of the required (and admittedly numerous) compliance tasks.
If mishandled, the potential pitfalls can work to outweigh the benefits of saving for retirement through your SMSF.
As a trustee of an SMSF you need to know about them, and as a trustee you should use an adviser like us to help you navigate this administration.
Overshooting the contributions cap
One of the more common mistakes that we observe is exceeding the annual concessional contributions cap. While this can affect anyone in superannuation, an added complication for SMSFs is that many, if not most, funds will have their administration tasks completed annually, and in arrears.
Because of this, members may not find out that a contribution took the fund over the contributions cap until the fund’s accounts are reviewed, which could be months after the end of the relevant financial year. Ongoing updates of contributions received can save headaches, so keep us in the loop.
Another way to be tripped up is investing in property. This can come about if, for example, a potential investor identifies a good investment property but does not have an SMSF. A deposit may be put on the real estate to secure it, and then the SMSF is established with the aim of owning that property through the fund. But in these circumstances, it will not be your SMSF that has bought the real estate but you as an individual.
Note once your SMSF is established, the rules stipulate that non-commercial property cannot be transferred into the fund. (Remember an SMSF is permitted to hold “business real property” in the fund.)
With any investment decision, you should contact us to discuss the correct vehicle for you to use otherwise it might be too late or two expensive to correct.
Tangles on pension tax and exceeding limits
Ordinary income and statutory income that a complying SMSF earns from assets held to provide for superannuation income stream benefits is exempt from income tax. This is referred to as exempt current pension income (ECPI), and the Tax Office reports that this is an area that has caused a lot of headaches for SMSFs claiming tax deductions in the past.
We have observed that calculation errors are mostly at fault when trustees perform their own calculations without any checking from their adviser. For the inexperienced, investment expenses and management and administration expenses are also mistakenly claimed against ECPI.
The Tax Office recommends that funds may need an actuarial certificate to determine the correct amount of exempt income they can claim.
The Tax Office says it is important to make sure that:
- all assets are re-valued to current market value before starting to pay a pension
- if the fund has income tax losses, not capital losses, the loss amount is reduced by the net ECPI amount. Any remaining tax losses can be offset against the SMSF’s assessable income
- all income earned during the financial year in the
- SMSF annual return is reported, even if the fund is in 100% pension phase,
- funds don’t claim a deduction for expenses relating to pension assets as the income is non-assessable
- if the fund has both assessable and non-assessable income, the expenses should be apportioned appropriately.
Also on the subject of pension payments, another item on the list of inadvertent mistakes is not meeting pension limits when the SMSF is in pension mode (minimum and maximum drawdowns) – either not meeting the minimum pension, or exceeding the maximum. We encourage you to ask this office for more details if you are contemplating going down this path.
Collectible and personal use of assets
The rules for collectible and personal use assets in SMSFs are changing. SMSF trustees who hold collectibles and personal use assets prior to July 1, 2011 will have to adjust to a new set of rules from July 1, 2016 or dispose of these investments prior to June 30, 2016. The purpose of the regulations is to ensure any investment is made for genuine retirement purposes rather any other ancillary purpose.
- antiques and artefacts
- coins and stamps
- rare folios, manuscripts or books
- wine or spirits
- motor vehicles and recreational boats; and memberships of sporting or social clubs.
If you think you have these types of assets in your SMSF, please discuss this with us well before July 1, 2016.
Welcome to the InterActive Tax Consultants’ news – part of our personal and easy to understand approach to taxation. We are committed to working with you to achieve the best results for your business. If you have any question or would like more information on any of the articles please contact us.