Things to do in 2016 with your SMSF
The lazy days of summer are here, bringing with them one year's end and the start of another. With that in mind, Money asked SMSF specialists what they see as the most important things to do (or not to do) in 2016.
The past year has been marked by market volatility and debates about super reforms - the last thing people need when planning for retirement. "Take advantage of the super rules as they stand now. They are almost too good to be true because we can see generosity shrinks over time," says Laura Menschik, a director and SMSF adviser at WLM Financial Services.
"At the moment people can make after-tax contributions of up to $180,000 a year as long as they are under 65 and working and over 65 if they meet the work test rules. They can also bring forward two years' contributions and make it $540,000. Years ago it was $1 million per year."
It's wise to diversify, she says. "People will often have property because that's one of the reasons to have an SMSF, where you can hold direct property. But it's very illiquid and it usually takes up a big chunk of a fund. Hence they need to look at diversifying as more contributions are received or property rental is received." International funds, hedged or unhedged, can help. "It depends which way the Australian dollar is going.
When it's falling, an unhedged fund usually proves valuable because it increases the value of the fund even if the underlying investments haven't done anything. So if you think the dollar is going south to 65c, there might be some more currency in there for an unhedged portfolio."
Menschik says compliance has never been more important. "The ATO has gotten more aggressive and they're looking at targeting SMSFs. If the fund becomes non-compliant, the penalties can be quite severe, so make sure you've got everything up to date." One of the biggest mistakes, she says, is trustees not registering the SMSF's assets correctly in the name of the fund.
Another common mistake, says Andrew Yee, a director of super at HLB Mann Judd, is using an SMSF as a piggy bank. "There's a temptation, if cash flow is under pressure, to take money out of the fund as a short-term loan and then put it back before the year's end, thinking, 'It's my fund so I can take money out and if I put it back in it will be all right'. But it isn't!"
He's also often astounded at how many people miss out on concessions. Take the over-60s: they can go into pension phase, even if working, and enjoy tax-free SMSF earnings and income from their fund.
"They may be over 60 and could draw a tax-free pension and the fund's earnings could be tax free. If the money isn't needed, it's fairly standard advice to recontribute the money into the fund to keep it bubbling away. We've had this regime in for the last seven or eight years and people are still not taking full advantage of it."
He agrees SMSFs can benefit from diversification. "If you look at the Future Fund, it's got alternative assets, infrastructure, bonds, overseas shares and hedge funds. That's a good model for SMSF investors. The fund has had double-digit returns for several years."
The SMSF Professionals' Association's Graeme Colley suggests people keep an eye open for changes and the impact they may have. He doubts contributions will be scaled back, given the need for adequate retirement savings and the pressure both political parties are under from retirees.
"In some rare good news, the Turnbull government has accepted most of the Murray review's recommendations giving financial consumers and investors greater protection, and rejected a ban on SMSFs borrowing to invest."
Poor pension paperwork will cost
Sloppy SMSF documentation can leave you and your fund owing the tax office a lot of money, advises Townsends Business and Corporate Lawyers.
"We continue to be surprised by the poor quality of documentation relating to SMSF pensions, including no or defective pension applications and agreements, no or defective trustee minutes and even trust deeds that don't empower the trustee to pay account-based or transition-to-retirement pensions," says Peter Townsend, a principal of the business.
He says it is crucial to check the trust deed and follow it to the letter. If there are problems with the contents of the trust deed, it may be possible to amend the deed or governing rules. "If the pension documents are not correct and in place, the pension may not have been effectively created, in which case the fund may still be in accumulation phase with the accompanying tax consequences."
It's advisable for pension documents to be prepared before the pension starts, with the opening balance confirmed later, if necessary, once the fund's accounts have been finalised for the relevant period.