When it seems too good to be true – it usually is!
Self-Managed Super Funds (SMSFs) are designed to be ... well, self-managed. Because their structure enables investors to take more control of their retirement savings plans, SMSFs are increasing in popularity.
The trustees of an SMSF are responsible for, among other things, the fund’s investment strategy and the regular review of that strategy. But occasionally, unwary trustees make improper or misinformed investment decisions.
Traps trustees find themselves in often result from relying on poor advice. Common scenarios include:
- assuming a fund in pension phase is no longer required to prepare financial reports and tax returns
- using an SMSF in pension phase for personal spending
- spending a weekend at a property owned by the fund
- displaying artwork owned by the SMSF in a member’s family home.
The Australian Taxation Office’s (ATO) in its publication, “Introduction for SMSF trustees” makes a very clear statement about collectables: “Don’t buy wine as an SMSF investment and then drink it. Don’t buy jewellery as an SMSF investment and then wear it.”
Similarly, it may be tempting to purchase a property on behalf of your SMSF and then rent it to a fund member or relative of a fund member. The ATO will not allow such an arrangement, except when the property is a commercial business property. For this reason, residential properties, including holiday homes, are not generally part of an SMSF’s property portfolio.
When making investment decisions, trustees must always comply with the Sole Purpose Test. This regulation states that an SMSF must be run for the sole purpose of providing retirement benefits for the fund’s members. Assets that are considered inappropriate and contravene the Sole Purpose Test may result in trustees facing civil or criminal charges.
SMSF strategies that appear elaborate or unusual invite regulatory scrutiny. Over-complicated schemes can be difficult to administer, can increase the likelihood of mistakes and can often attract higher costs. Successful trustees generally steer clear of investments that seem convoluted or do not offer simple administration, full disclosure of all fees, and unambiguous terms and conditions.
Trustees offering separate strategies for individual SMSF members quickly find themselves burdened by paperwork and inflated costs. Regular reviews of your SMSF’s investment strategy should consider the members’ needs and future benefits, including transition to retirement and life insurance, without over-complicating matters.
Another trap for unsuspecting investors is specific to the modern era: share-trading software. Quite often – though not in all cases – these tools exaggerate past returns and understate risks. The golden rule is simple: superannuation should be viewed as a long-term strategy; get-rich-quick schemes are best avoided.
When in doubt, always seek professional advice, and remember that if it seems too good to be true ... you know the rest!