The 10 SMSF rules that need urgent reform: Ken Raiss

Amid increasing pressure on trustees of self-managed super funds (SMSFs) to keep pace with the steady stream of quiet pronouncements from the ATO, we turn the spotlight on some overlooked SMSF guidelines in need of urgent reform in 2013.

As a relatively young but rapidly evolving model, SMSF compliance guidelines contain more than their fair share of unnecessary and arbitrary rules. Some of these are discriminatory, lack logic or simply make the process of providing for independent retirement unnecessarily difficult.

Chan & Naylor has compiled the following list of 10 SMSF rules that themselves either require retirement or modification.

The ATO must broaden the net of reform to ensure arbitrary SMSF ruling is afforded urgent review and the best interests of Australian investors are put first.

1) An SMSF must have no more than four members.

SMSFs are most often used to provide for retirement income for all family members, yet four trustee positions would not be enough to cater for the average Australian household. The figure should respond to the nation’s needs as opposed to forcing families to either leave family members out of the SMSF or pay to set up an additional fund.

2) An SMSF cannot borrow money to pay for improvements to a single acquirable asset.

Should a trustee require money to renovate a property, it cannot be loaned in an SMSF because it is considered to increase risk, though trustees are still allowed to borrow money to purchase that property or asset in an SMSF.

3) A person must pay to set up separate holding trusts per single acquirable asset with debt.

Instead of adding acquirable assets with debt into the same trust structure, trustees must pay to set up another.

4) Life insurance (which is tax-deductable in super) cannot be moved from an individual name to a self-managed superfund unless the existing policy is cancelled and reissued.

Those who experience a change in circumstances while doing so, such as entering a new age group or different health, could find their new policy does not provide the same cover as their previous insurance policy, or worse still, cannot be re-written.

5) If a person is insured in super, they can only claim tax deductions for TDP (total and permanent disability) provided they are unable to work in any occupation.

This should also apply for a person’s own occupation.

6) It is prohibited to buy residential property or unlisted shares through an SMSF from a related party (wife, family member, etc.), even if supported with a registered valuation.

It is, however, acceptable to do the same with commercial property or shares. As long as the sole purpose test is passed there should be no limitation on from whom the asset is purchased if executed at arm’s length.

7) After the age of 65, a trustee is no longer entitled to the three-year average contribution.

This is age discriminatory. Anybody should be able to benefit from the three-year average contribution entitlement regardless of age.

8) Once a trustee reaches the age of 75, he or she may no longer contribute the full super contribution limit of $25,000 per annum.

This rule is discriminatory, especially as more Australians are both living and working for longer.

9) SMSFs must pay for manual amendments with each change to the SIS Act.

However, the big superfunds, covered by their associations, adopt legislation changes automatically. An SMSF deed, through legislation, should automatically pick up any changes to the SIS Act.

10) Trustees can suffer destructive penalties of up to 93% on over-contributions.

Excessive penalties should be axed for genuine errors.