3 Important things you should know about Self Managed Super Funds (SMSFs)

Do your research when it comes to SMSFs, this will pay off in the long run and help you avoid potential pitfalls.

Self managed super funds (SMSFs) have gained popularity in recent years, but before you jump on the band wagon, here are 3 important things you should know about SMSFs. If you are researching SMSFs, you may also be interested in my previous articles here:

I have drawn on real-life cases to help illustrate 3 potential pitfalls in SMSFs. You can find more details of each case at the Australasian Legal Information Institute.

 

1.’Self managed’ may offer MORE flexibility, but it also brings with it MORE associated responsibilities.

Shail Superannuation Fund v Commissioner of Taxation [2011] AATA 940

Mr and Mrs Shail established The Shail Superannuation Fund in the 1990s. Over the years, the couple’s relationship went from happily ever after to strained and eventual separation. Mr Shail decided to transfer approximately $3.5m to his overseas bank account and bought a one-way ticket out of Australia. The self managed super fund had no assets left.

To make matters worse, neither Mr nor Mrs Shail met a condition of release and therefore were not eligible to withdraw any money from their self managed super fund. Mrs Shail claimed she did not have any knowledge or involvement regarding the withdrawal.

Consequently, the Australian Taxation Office (ATO) issued a notice of non-compliance, stripping the SMSF of its concessional tax rate. The ATO asked the trustees for about $1.6m of tax payable in addition to a very hefty penalty. The ATO held Mrs Shail personally liable for the entire amounts owed as Mr Shail was not in Australia. Sadly, Mrs Shail lost all her SMSF wealth and owed the ATO a couple of million dollars.

Learnings: In this example, the responsibilities and risks involved with the SMSF have not been fully understood, resulting in dire consequences.

 

2. Improper planning or mismanagement of your SMSF could result in inter-generational financial mess for your family and loved ones.

Katz v Grossman [2005] NSWSC 934

Husband and wife team Mr and Mrs Katz ran this self managed super fund. When Ervin Katz’s wife passed away in 1999, he appointed his daughter Linda Grossman as an additional trustee. Linda admitted herself as a member of the SMSF just before Ervin’s death.

After Ervin passed away, Linda appointed her husband as an additional trustee. Using the trustee’s power, they dictated that the SMSF will only pay Ervin’s death benefits  to Linda Grossman. Ervin Kats had initially planned for the SMSF to pay death benefits equally between his son (Daniel Katz) and daughter (Linda Grossman).

Learnings: SMSF require thorough ongoing planning, otherwise it can create a great deal of harm.

 

3. It is important for all families – especially if you have a blended family – to have an SMSF exit strategy.

Wooster v Morris [2013] VSC 594

Maxwell Morris and his second wife Patricia Morris ran their own self managed super fund. Maxwell wanted all his interest in the SMSF to be passed to his two daughters from his first marriage upon his death. When Maxwell passed away in 2010, Patricia appointed a corporate trustee in which she was the sole director. She exercised trustee discretion and paid all of Maxwell’s benefits to herself instead of Maxwell’s two daughters.

Learnings: Every SMSF requires an exit strategy and ongoing objective evaluation. It is an important safeguard for you and your loved ones.

 

In addition to the above, there are several other interesting cases that show potential pitfalls of self managed super funds:

 

As a self managed super fund advisor, I think SMSFs can work very well with the right management and planning. It is crucial that clients understand the additional responsibilities associated with SMSFs.