Self Managed Superannuation Funds (“SMSF’s”) have long lived under a very harsh penalty regime. If a trustee failed to meet their obligations then the Australian Tax Office (ATO) was able or even required to declare the fund “non-complying”. That was a nuclear bomb option as it resulted in the fund assets being taxed at the top marginal tax rate, and potentially took half of every members’ assets for even technical administrative failures.
Self Managed Super Non-Compliance Penalties
The ATO has released draft guidelines for how it will treat breaches of the obligations for correctly running your own self managed super fund, and they appear to be a prudent approach, based on reasonable expectations of the average human being – who is neither perfect, nor able to operate, purchase or maintain any system perfectly. Small *YAY!* for prudential regulation!
SMSF’s have been oversold
Ok. i’ll admit to putting a target on my forehead when i even suggest this. Self managed super funds have become very, very big business, and a lot of people in the industry would consider my comment to be blasphemy. However, it’s my proposition that many people have set up their own super fund in the last 5 years or so for entirely the wrong reasons. Here’s a few:
- Super funds are too expensive
- Fund managers provide poor returns
- Super funds don’t let you buy shares
- You want control over your money
- You want to put your money into term deposits and cash
i can comfortably suggest that these are the wrong reasons because a great deal of these issues can be tackled quite simply through publicly available funds, where big, fat institutions take the responsibilities of trusteeship. You can find cheap super funds. You can find funds that let you buy shares – even Industry Funds such as AustralianSuper are now altering their systems to let members have a limited access to shares, as they are having to compete harder and harder against retail funds and the huge self managed super fund sector. You can find funds that let you invest into term deposits and a lot of those have particularly low fees.
Even all of the above doesn’t suggest self managed super funds have been oversold though. What does suggest they have been oversold, is the number of people that have been prepared to go the “SMSF” route EVEN in the face of potential 47%+ penalties for non-compliance. Many of the financial planners and Accountants that i speak to consider me ridiculous or too conservative for my stance on this issue. Many have told me that the ATO wouldn’t do that for non-compliance. If you believe that then i’ve got a coat-hanger shaped bridge to sell you on the cheap. Many years ago, i had to help a client argue against a declaration of non-compliance, and i can assure you that it is not a position you want to be in.
In addition to all of this, there has been the simple knee-jerk reaction to Do-It-Yourself. Australian’s are notoriously proud of their DIY capabilities (just visit Bunnings and look at all those folks looking bewildered while they hold a bunch of widgets in their hands), so it’s only a small step to deciding that money is no different to tap washers and hacksaws. As a very old man in the financial planning world, i remember this whole process occurring after the 1987 sharemarket crash, and watched in subsequent years as markets recovered and many people moved back to having someone else run their fund. In hard times it can be easier for Accountants, financial planners and lawyers to just agree that this or that person should set up their own fund rather than try to argue against the idea in the face of the list of issues raised above.
There are a number of logical situations in which you would want to set up your own SMSF. If anyone is interested, i can go into more detail but right now the key point is that this new legislation will remove what i always considered to be one of the bigger roadblocks to setting up and running your own fund.
The proposed self managed super penalties legislation suggests that basic administration errors will have a far more “scaled” penalty system, with more gentle penalties available to the ATO to deal with non-compliance, and that is only fair. It’s no longer (at least, “will no longer be”, after these proposals are actually legislated into action) such a matter of life-and-death as to whether you or someone else meets some arcane administration or legislative threshold.
Self Managed Super – Financial Planner Bias
Bias is always going to raise its head when you talk about money – even if only for the wrong reasons. However, self-managed super funds have been marketed as a “ring fence” that planners can use to make sure they are able to keep clients in the face of increased competition from other money professionals. Accountants have sometimes seem self managed super funds as an alternative revenue source in a declining market, as a lot of “bread-and-butter” returns are submitted direct to the ATO through the online portal.
The global financial crisis (“GFC”) caused many people to question why they bothered with professional management for their super at all. Here’s some of the thinking behind this:
- Why pay someone to help you lose money?
- Why go through all this mumbo-jumbo technical talk if my own term deposit has outperformed the professionals?
- How can managers lay straight in bed at night when they are taking up to 2% a year in fees – at a time when returns are negative or so low that the fees kill the pitiful returns that are achieved?
- i don’t trust super funds or the people that run them.
- My property investments have comfortably outperformed all this fancy sharemarket rubbish.
- It hasn’t paid for me to pass the running of my money to someone else, so i’ll take it back myself. I’ll control what happens, when and why.
- My adviser/fund manager didn’t see the GFC coming, so how can i trust their recommendations?
In the face of all this, many people decided that setting up a self managed super fund was the only logical outcome. Now in many cases it was – but if you don’t think that financial planners, Accountants or lawyers have pushed these outcomes then…
In this case it is a little different though. Self managed super funds have now gained a momentum of their own, and one that i think has become independent of markets and market returns. Many people have found that they do actually hold the skills necessary to run their own fund. Self managed super funds now control around a third of all super money in Australia and there are over 400,000 funds in operation. Not all deal with a financial adviser or Accountants.
Think before you jump
Starting your own self managed super fund is a reasonable step in a limited set of situations. Take care before you leap into the role of trustee – it’s not an obligation you should take lightly, and you should ALWAYS keep in mind that the buck stops with you. You can ask a planner to help with investments, an Accountant to help with administration and/ or auditing or appoint and pay for a SMSF specialist administrator to take over most of the tasks of the fund… BUT you always remain the character sitting in the dock when push comes to shove, so remember that you can pass on the responsibility – but you can NEVER pass on the accountability. It’s yours, and yours alone.
Before anyone gets worried about whether they should or should not be in a self managed super fund, let’s clarify that this post is only dealing with one of the many aspects of setting up and running your own self managed super fund. i happen to consider the self managed super fund penalty regime to be integral to any decision to run your own fund. That’s my bias and that’s my opinion. There are plenty of far more qualified and capable folk out there who would scoff at my suggestion, so please feel free to do your own homework on this one.
i am not against self managed super funds in the slightest – i have had decades of intimate exposure to the operation of self managed super funds, and they are a great idea when used correctly and in the correct circumstances. It’s just that my personal observations of the industry suggest that there are a lot of people in self managed super funds who probably don’t need to have that extra trustee responsibility to achieve their financial objectives.
It seems ridiculous to make this suggestion in a market so oriented towards “do-it-yourself” but it really is essential to get professional support to run your own super fund. It’s a bit like do-it-yourself wills except… DIY wills are generally ok, and are quite often sufficient for very, very basic circumstances – but you won’t be around to sort out any mess your mistakes create. You certainly will be around to face the music for any mess from an incorrectly run self managed super fund, and it will cost you cash. The legislation is arcane, complex and ever-changing. It is not a place for amateurs. How’s that for a disclaimer?