Understanding self-managed super


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The tax office can sometimes be a bit heavy-handed in its regulation of self-managed super funds (SMSFs), although to date it has preferred a softly softly approach.

As part of this policy it is constantly issuing written guidelines - in reality, firm directions, covering precisely how superannuation law operates in practice.

In addition it issues verbal warnings when it believes SMSFs aren't fully complying with the law. Three recently documented by Thomson Reuters in its weekly tax bulletins centre on :

  • The use of so-called "re-reporting" of contributions to avoid penalties for breaching contribution limits
  • The failure of some SMSFs to manage their allocated pensions properly
  • Breaches of procedures for ensuring concessional contributions are tax deductible.

A related contributions issue, recently raised by Martin Heffron of SMSF specialist Heffron Consulting, is the risk that some people inadvertently are breaching new rules that determine whether or not you may be eligible for a tax deduction for your contributions.

The first warning centres on SMSFs re-reporting a member's contributions immediately after the tax office has notified a breach of the contributions limit and so the possible imposition of penalty tax. This re-reporting often involves the fund notifying the tax office that the contributions were in fact non-concessional (that is, not tax deductible) rather than concessional (that is, tax deductible).

While in some cases a genuine mistake is being corrected, in others it is driven solely by a desire to avoid being hit by the extra tax. Neil Olesen, a tax office deputy commissioner, said the tax office intends to counter this by increasing its scrutiny of re-reporting over coming months. The second issue is the way some SMSFs that pay account-based pensions are failing to get the required actuarial certificates.

While such certificates aren't required when the members of a fund have separate accounts with clearly segregated assets backing them, the certificates are mandatory if the pensions are being paid out of a shared pool of assets. Failure to get the certificate can put at risk the tax-free nature of the pension payments.

The third issue involves the failure of a self-employed member to lodge a notice with their fund formally stating their intention to a claim a tax deduction for all or part of their contributions.

It has to be lodged before whichever of the following two events occurs first: the day the taxpayer lodges their income tax return for the year the contributions were made or, the end of the financial year after the financial year in which the taxpayer made the contributions. Failing to satisfy this requirement can mean any tax deduction claimed is disallowed.

Finally, Heffron warns the technical definition of self-employment, and so potential eligibility for this deduction, no longer depends on whether or not you are eligible for the super guarantee (SG) contributions.

These days the SG is irrelevant. The sole test now is the need to receive less than 10% of your income from working as an employee. This is a test many contractors who perform duties on a company's premises will struggle to pass.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.