Practice management areas for Self Managed Superannuation Funds

Those who regularly read my column in Peace of Mind will know that that my practise focuses on the niche area of advising trustees of self-managed super funds (SMSFs). One of my fellow directors, James Cotis, is well known in the accounting circles for his expertise in this area. James regularly lectures to the ICAA and CPAA professional accounting bodies, in fact James was recently named in a recent financial journal by Grant Abbott, renowned and highly acclaimed superannuation expert, as the premier SMSF Adviser in the country.

I am assuming that the majority of the readership for this excellent publication is probably in, or closing on retirement. Should I be correct, then this paper written by James for the Institute of Chartered Accountants Australia (ICAA) about 12 months ago, would greatly interest those who may either be a trustee of a SMSF, may be considering the role, or their accountant/professional adviser may have suggested they consider such a strategy. I am sure you will find it informative.

Over the past two years I have spoken at a number of ICA tax discussion groups on various practice management issues in relation to SMSFs. It is not surprising that the majority of participants have a number of clients who have established SMSFs or are looking into setting up a SMSF with employee superannuation choice looming.

There is no doubt that SMSFs represent a solid growth area for many accounting practices, however, from my discussions with a number of members of these discussion groups is there are a number of practice management areas that need to be addressed. Some of the more important issues include:

1. Trust Deeds

For the most part accountants recommend a particular SMSF trust deed to clients without having detailed knowledge of its contents. The recommendation comes as a consequence of an existing relationship with a local legal firm or because it is the lowest price in the market. There are a number of problems with this practice including:

• Section 55(1) of the SIS Act 1993 requires the trustee, accountant and auditor amongst others to obey all the rules contained in the trust deed. Where there is a breach of those rules the fund becomes a non-complying fund and is subject to penalty taxes.
• Many of the trust deeds that I have reviewed are not SMSF deeds at all but employer deeds where the principal employer has sole right as to how the fund operates, who the members are, how benefits are to be taken, etc. The sting in the tail is that many of the funds using this style of deed do not have a principal employer because the members are retirees, self employed or not signed up as a principal employer. Thus the fund has been breaching the deed since the fund's establishment and in reality may never have been a superannuation fund in the first place. As such, the fund should be treated as any trust for taxation purposes - one that, of course, has not distributed its income, and we know what happens there under the tax laws (ie. 48.5%);
• All of the trust deeds that I have reviewed have specific member and fund accounting principles built into the deed. These must be adhered to by the trustee and accountant otherwise a breach of the deed occurs and the fund becomes non-complying.

It is very easy in a busy accounting practice to cut corners with the big tax compliance work load shifted onto accountants by the Commissioner of Taxation. However, trust deeds for client SMSFs is not such an area. To date, I have seen a number of legal actions taken under section 55(3) of the SIS Act against advisers who have breached a trust deed and this has created a loss for the client - particularly around the investment rules in the deed. The cost to the accounting and advising firms in question have been in the six figures - a significant price to pay and one where ignorance of the deed is not a defence!

2. Getting the fund to be a SMSF

Section 17A of the SIS Act lays down a number of rules that must not be breached in terms of a fund claiming to be a SMSF. If the trustee of a fund or its advisers - such as an accountant, auditor or financial planner - does not understand the rules intimately, it may be very costly for the client and the adviser concerned.

Just recently at a Sydney tax discussion group I found an accountant who had established a SMSF for a client with mum, dad and the two children as members of the fund. Although the accountant was well aware that all members must be trustees, only mum and dad had been appointed as trustees of the fund. As a result there was a breach of section 121A of the SIS Act. This section provides that where members of the fund are not trustees then the trustee must be an approved trustee such as the Public Trustee or other firms that offer approved trustee services. If the trustee is not an approved trustee then any person involved in the contravention of section 121A is subject - if found guilty - to a term of imprisonment not exceeding six months. More importantly, section 121A is strict liability meaning that there is no ability to defend such an action.

Although the chances of getting caught by the Commissioner may seem remote, nothing can be taken for granted. Recently the Commissioner sent out a survey seeking to clean up his data base of SMSFs - the survey was looking for funds that breached the SMSF definitional requirements. If found to be in breach the Commissioner has let it be known that he will transfer the funds over to APRA and also remove the trustees as trustees of the fund. This year alone the Commissioner has removed more than 20 SMSF trustees from funds that have over stepped the mark.

As a final comment, SMSFs are a growing area of practice for many accountants, however, great care needs to be had to ensuring that SMSF compliance practices are strictly met. Our firm, which specialises in the provision of SMSF advice to accountants and their clients, takes great care in not only ensuring that their SMSF meets the highest possible standard for compliance (defined by us as best practise) but also that the trustee takes advantage of all the wonderful tax effective, asset protection and estate planning strategies available for those who choose to run their own fund.