Some of the biggest mistakes made by SMSFs

Some of the biggest mistakes made by SMSFs

While SMSFs are considered one of the effective ways to manage super funds, a couple of mistakes are usually committed. For that reason, we shall discuss the most common mistakes made when running an SMSF.

  1. Drawing on Self-Managed Super Funds when faced with financial hardship

Taking retirement savings to use for business or personal needs is one of the major mistakes that many SMSFs make. Some people draw money from the fund accounts to assist themselves, relative or close friend cover personal or business expenses. Often those who do that are innocently unaware of the regulation requirements.

Every person involved in this kind of superannuation funds needs to know how to separate business and personal bank accounts from their SMSF accounts. Both the fund and the member can suffer severe penalties when money is taken from the super fund before the right time reaches. An individual should make sure to repay the amount as soon as possible in case it is withdrawn for breach of set rules. Due to strict laws, a person who frequently breaches the rules may suffer financial penalties and be disqualified from running an SMSF.

  1. Putting more money than what the superannuation law prescribes

Superannuation contribution caps should be respected when using these kinds of funds. Failure to adhere to such limits is also a mistake common to some SMSF members. The current Concessional contributions cap is $25,000, and for those aged above 50 years is $50,000 while the Non-Concessional Contributions cap is around $150,000. Remember that Concessional contributions usually entail salary sacrificed amounts plus compulsory employer contributions (9%). Personal contributions made that are usually made from members after-tax income form the Non-Concessional Contributions.

A member has two employers who both make 9% contributions to this fund is the most common causes for this scenario according to the Australian Taxation Office.

  1. Making investments without the fund’s name

Putting investments of the funds in another name is a mistake that can create numerous problems. When running an SMSF, ensure that you don’t mix up personal investments with SMSF investments. Superannuation law requires that fund’s assets must be in the name of either a corporate trustee or individual trustee.

In case for some reason providing the name not possible, supporting documentation like trustee minutes or declarations of trust should be maintained to demonstrate that the assets are the fund’s possession. In a circumstance where a member is declared bankrupt, member’s creditors in most cases would be unable to access the investments that are in the name of the fund. So, as you operate the fund, ensure that the investments are put in the right name.

  1. Not planning for a member’s illness

Under most circumstances, there is usually a single dominant member who often looks after the fund’s management and a lot of investment decisions. Members may fail to gain the best benefits if that member falls ill or dies since there may not be anyone to manage the fund. The reason for this is that other members might lack adequate knowledge about the fund’s investment or SMSFs operations. Therefore, it is advisable for older SMSF members to invite their children to be members of the fund to avoid such scenarios.

  1. Not establishing an appropriate insurance cover

Often SMSF members forget to institute their death and disability insurance when transferring their existing superannuation balances from industry or retail. A lot of industry and retail funds have some insurance level that doesn’t require members to undergo a health check. It is crucial to choose an appropriate insurance level when setting up an SMSF.

  1. Failing to stick to the investment rules

SMSF is allowed to invest in a wide variety of investments, including property, shares, cash, and term deposits. However, the fund should ensure that it follows the appropriate investment rules. Therefore, members, trustees, relatives, and trusts or companies under their control should also follow suit. Otherwise, the fund might lose tax concessions and even suffer penalties when it leases or invests in assets and takes a loan.

Unless the superannuation law permits, money or assets belonging to the fund ought not to be utilized for business or personal purposes. For instance, a fund can lease commercial properties to other related parties on a commercial basis as long as the investment strategy of the fund allows it. However, an individual cannot use the fund’s money as a source of cheap finance and for emergencies.

Therefore, the trustees need to continuously plan and monitor the SMSF, with regard to changes in investment and other related parties, to comply with investment rules.

  1. Not paying at least the minimum pension

Failure to pay the minimum pension amount can cause problems to any individual receiving a transition-to-retirement pension or in retirement phase. Some of the problems include compliance issues and unnecessary tax. Facing tax issues can lead to lack of maximization of tax concessions.

In case a tax-free is given on income earned from assets that support retirement phase pensions, some strict rules apply. Since an individual can lose benefits and even pay tax on such earnings if the pensions are not well maintained.

There are some instances where unexpected errors occur that causes small pension underpayments. To redeem the situation and get things back on track, make a catch-up payment so that tax concessions are not impacted.

  1. Storing documents improperly

An SMSF usually has crucial documentation that needs to be stored in a proper way. Such documents include trust deed, membership and trustee acceptances, meetings and decisions minutes, and also investment information. These documents are necessary for the audit, compliance, and trustees’ accountability purposes. If any of the documents get lost, the consequences might be tough — trustees, members, and other people may get into disputes about fund benefit claims.

  1. Not taking adequate time to run the SMSF

Many people don’t realize that an SMSF requires a substantial amount of time for one to reap benefits from it — and that is a mistake. When running an SMSF, you become your own boss. Meaning that you will have to complete most of the SMSF things by yourself.

As you well know that managing a super fund entails knowing the investment strategy to take. Implementing such a strategy usually takes a substantial amount of time. Although time is a finite precious commodity, it has to be used fairly in managing things of value such as your SMSF. Therefore, before committing yourself to run your fund, ensure that you have adequate time at hand.

The above article is information only and mot advice.