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Self Managed Superannuation Funds (SMSFs Pitfalls)

Before establishing your own Self Managed Superannuation Fund (SMSF) you need to be aware of the pitfalls SMSF members encounter. 

If you are at all uncomfortable about complying with any of these issues then perhaps a public offer fund is more appropriate for you.

Trustee Responsibility

Trustees are expected to have a knowledge of tax and superannuation laws and must make sure their fund complies with those laws. If an SMSF is deemed to be non-compliant by the ATO, then the fund will be taxed at the highest marginal tax rate. Up to half the fund's assets may be lost to tax. Compliance risk is borne by the SMSF trustees, who can be personally fined if their fund breaches the law.

All trustees are bound by the trust deed and are equally responsible if its rules are not followed.

Having an insufficient initial balance

Industry consensus says that $200, 000 is the lowest practical amount that an SMSF's combined value should be to offset compliance costs. Unless there are plans to rapidly increase the value of the SMSF, it may be more appropriate to use a publically offered fund for balances less than this amount. It is important to factor in investment and advisory costs when calculating the value of the fund.

Withdrawing SMSF funds for your business or personal needs

SMSF funds should not be regarded as money that can be withdrawn to cover business or personal costs. Regulation prohibits fund members from being able to withdraw funds or provide financial assistance. There are also restrictions on lending to members, and to entities owned by members or to relatives.

Members working overseas

For an SMSF to be compliant and receive concessional tax treatment, it must be an Australian resident fund. If members work overseas, the SMSF may be at risk of losing its complying status. The law requires that trustees and most contributing members work and live in Australia. Central management and control of the fund must also be in Australia.

Failing to keep proper records

An SMSF requires detailed paperwork, annual financial statements, source documentation such as contract notes and minutes documenting of investment decisions. If the trustees of the fund are poor record keepers, it is worth considering outsourcing this to an accountant or advisor which will add to the cost of using an SMSF.

When setting up an SMSF, make sure that it is truly the best option and that all relevant rules are fully understood and complied with.

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Disclaimer

The information provided in this information sheet does not constitute advice.  The information is general in nature only and does not take into account your financial situation.  It should not be used, relied upon, or treated as a substitute for specific professional advice.  We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.

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