It pays not to make mistakes with your nest egg

As a self-managed superannuation fund (SMSF) auditor with 16 years in the industry, I have seen many people with SMSFs make critical errors, some of which have cost them their life savings. Let’s look at some of the common mistakes.

An SMSF can only be established either under a structure with an individual trustee or a corporate trustee. You cannot have both. A single member SMSF under individual trustees’ structure must have at least two trustees — the single member cannot be the sole trustee and member. If a person has been convicted of a serious dishonest offence or is bankrupted then they are a “disqualified person” and cannot be a member or trustee
of a SMSF.

The flexibility of an SMSF can be a problem. People can be tempted to use money in their SMSF when they face financial hardship because they control the SMSF’s bank account. However, there are severe penalties for illegally getting money from your SMSF for personal benefit. SMSF money and assets must also be kept separate from personal assets as trustees can be fined up to $17,000 for not doing so.

It is also not uncommon for trustees to make the mistake of acquiring residential properties for the SMSF from members. Although a SMSF can buy a business or commercial property from a member, it cannot buy a residential property from a member.

Incorrect borrowing structures are another common mistake. Too many borrowing structures have been established incorrectly, where only one holding trustee is established for several assets or incorrect names are recorded on the ownership and loan documents. SMSF members need to keep a close watch on money going into their fund. The concessional contribution limit of $25,000 is often breached because members fail to monitor what their employer has paid into their SMSF throughout the financial year. Breaching the limit will result in SMSFs having to pay extra tax.

Making investments in a related entity is also fraught with danger. SMSFs can only invest up to 5 per cent of its total asset value in a related entity unless the related entity satisfies certain conditions including not investing in other entities or having borrowings. Trustees often invest more than this 5 per cent cap, without meeting the conditions, meaning the investment must be unwound. Finally, and perhaps most importantly, all members of the fund are equally responsible. Most SMSFs are established by husbands and wives. If one of the members makes a decision that breaks the law, the other member is held equally accountable. It is crucial that all members have some input in the decision-making of the fund and at least make themselves aware of their legal obligations.