THE rebound in share prices shouldn’t lull super fund members into a false sense of security about the possibility of losing money in superannuation.
There are plenty of ways to lose money in superannuation that have little or nothing to do with investment markets.
Countless super fund members could miss out on large chunks of their super savings because of employer or super fund incompetence.
And some trustees of self-managed super funds could be jeopardising much of their super assets by misunderstanding or ignoring the strict rules applying to funds that borrow to invest.
Further, many SME owners could be putting their entire super at risk by holding their business premises in self-managed funds without considering the possible consequences of things not going to plan.
Here are seven real-life super horror stories to watch out for:
1. Large super fund accidentally deducts $85,000
Circumstances: A self-employed member of one of Australia’s biggest funds notified the fund that he wished to claim tax deductions for $100,000 of his personal contributions. (At the time an eligible member over 50 was entitled to deductions for up to this amount.)
The fund’s response should have been to deduct $15,000 in contributions tax from the deductible (non-concessional) contributions.
Instead, the fund deducted the entire $100,000 from the member’s balance. In short, the fund made an $85,000 mistake at the member’s expense.
How such a fumbling human error occurred at a time of highly computerised systems is bewildering. The member had carefully filled out the correct form when notifying the fund.
Consequences: The alert member happened to check his balance online and picked up the error.
But the fund’s call centre showed complete indifference when notified of the mistake, using words such as: “Your balance is your balance as shown in your online statement.” Then the well-connected member kicked up a storm with the fund’s senior management and the mistake was rectified with an apology.
Tips: Regularly check your balance online. Don’t trust your fund to get it right.
And if you pick up a mistake and your fund won’t rectify it immediately, make a formal written complaint to the fund. Then if it is still not fixed, complain to the Superannuation Complaints Tribunal .
Given the huge number of super fund members, the tribunal hears a relatively small number of complaints. However, the great unknown is the number of errors that go undetected.
2. Employer fails to pass on salary-sacrificed contributions to fund
Circumstances: An employee working in a branch office made large salary-sacrificed super contributions each payday. The amounts were being deducted from his pay but head office was simply not forwarding the money to his super fund.
Fraud wasn’t involved. It was sheer incompetence by the employer.
Consequences: When the error was finally rectified, the amount of missing contributions had reached $30,000.
The employee had first complained to the pay officer at the branch office, who said head office had been instructed, in writing, to forward the salary-sacrificed contributions to its corporate super fund. And the branch pay officer then washed his hands of the issue.
And then the employee made repeated complaints to a director of the super fund’s trustee board, who was an employee of the same company.
The trustee director expressed much concern but failed to immediately fix the error or, apparently, ask the employer what happened to the money. After more than two years, the missing contributions plus earnings were eventually credited to the member’s account.
Tips: After failing to get an adequate response from the local pay officer, this employee should have complained to company management at both head office and in the local branch. However, he was correct in keeping the fund informed – particularly as it was a corporate fund.
Senior management should have taken great interest in the complaint, as fraud could have easily been involved.
The bottom-line is to regularly check your balance online. (At the time of the incident, the particular fund did not provide online access to members’ accounts.)
Brad Rosenthal, head of global sales and marketing for Payment Adviser, says salary-sacrificed contributions can remain unprocessed by an employer most typically when it has a policy of making payments to funds by cheque.
Rice Warner Actuaries estimates that up to 80% of salary-sacrificed and superannuation guarantee (SG) contributions are paid by cheque.
The Cooper superannuation review recommended the introduction of a standardised system for the electronic transfer of salary-sacrificed and SG contributions from employers to funds.
And the Cooper review expressed concern that there was no legal time limit for employers to remit salary-sacrificed contributions to funds.
3. Self-managed fund forced to sell members’ business premises
Circumstances:A self-managed super fund held its members’ business premises as its only asset.
As permitted under superannuation law, the business paid the fund market rent, which was taxed at the concessional rate of 15%.
The members’ long-term plan was to sell the premises once the members retired in their 60s and were eligible for a tax-free superannuation pension. As well, proceeds from the sale of fund assets backing the payment of a pension are no longer subject to CGT.
The trouble is that everything didn’t go to plan. One of the two fund members, who were business partners, unexpectedly died and the fund had to pay superannuation death benefits to his widow.
Consequences: This meant the fund was forced to sell the business premises in a weak real estate market to pay the death benefits.
The sale price was further weakened because the business premises had been expensively fitted-out to suit a particular type of business. It was not appealing to many buyers.
Tips: Both the (very strong) positives and (very strong) negatives of holding business premises in a self-managed super fund should be carefully considered before adopting the strategy. It would be worth discussing with a quality financial planner whether a fund should ideally hold other assets of at least equal value to the business premises to reduce the likelihood of a forced sale.
4. Much of a fund’s assets are wiped-out after ill-fated borrowing
Circumstances: A self-managed fund was almost destroyed after a geared investment turned bad.
Under special provisions in superannuation law, DIY funds are allowed to borrow to invest provided stringent requirements are met.
The geared asset must be held in trust until the final payment is made. And a fund is not allowed to provide any assets as security for the loan – other than the geared asset.
The fund in this case study had used most of its assets to pay the first couple of instalments of the investment loan.
But if the geared investment fails, as it did in this case, the fund can lose any instalments paid plus interest paid on the loan.
Consequences: The fund, in this case study, reached the conclusion that the geared investment was poor and decided to stop making payments. This led to the forced sale loss of much of the fund’s assets.
Tips: The bottom line, says superannuation and tax lawyer Robert Richards, principal of Robert Richards & Associates, is that a self-managed fund should not borrow to invest unless its trustees fully understand the borrowing provisions, their obligations as trustees, and the real risks involved.
“Self-managed funds shouldn’t just borrow because they can,” Richards emphasises.
5. Self-managed fund is only a phantom
Circumstances: A self-managed fund is kept in existence for many years despite both its members having extremely low balances and despite continual late lodgement of regulatory and tax returns. Any investment returns are eroded by fees, including for administration.
It could be called a phantom fund because it almost does not exist.
ATO statistics show that 7% of Australia’s 429,000-plus self-managed funds –more than 30,000 funds – have less than $50,000 in assets. Some funds hold less than $20,000 in assets.
Consequences: This particular phantom fund is simply not financially feasible and is only being kept going as a matter of habit. In short, its members are unnecessarily destroying their retirement savings.
Tips: Compare the fund’s net performance with the performance (after fees and investment management fees) of the large funds. (Balanced portfolios of the large funds earned 9.79% in the 2009-10 financial year, and 6.21% over seven years, according to fund researcher SuperRatings.)
Given the GFC, large fund returns are far from impressive but at least they are positive.
If your DIY fund’s returns don’t measure up to the big funds, either close it or ask a good professional adviser whether it can be salvaged.
6. Fund loses most of its assets in tax
Circumstances: The ATO removed a DIY fund’s complying status, resulting in all of it is assets – less non-concessional or after-tax contributions – being taxed at a shocking 45%.
The ATO took this action because the fund had lent a large amount of money to a member in a clear breach of superannuation law and then failed to recover it when instructed by the regulator. In turn, the member had lost the money in a failed investment.
Consequences: The fund lost a huge chunk of its assets in tax and the money may never be recovered from the member.
Tips: This unfortunate story underlines why fund trustees should understand at least the basic laws applying to operating a self-managed fund – including the bar on lending to members – and ensure their adherence.
7. Fund member slugged by another nightmare tax
Circumstances: This self-employed member contributed a huge inheritance to super, overshooting the annual caps on both concessional and non-concessional contributions.
Consequences: The contributions that overshot both caps were taxed at the dreaded 93%.
The tax commissioner has the discretion to disregard excess contributions or allocate the amounts to another financial year in “special circumstances”. But anyone who has made an excess contribution shouldn’t get optimistic about the commissioner providing a way out.
“It is clear the discretion will only be exercised in circumstances that are beyond the member’s control,” says Stuart Jones, author of Australian Superannuation Handbook 2010-11, published by Thomson Reuters.
Jones warns that a member who overshoots the contribution caps because some contributions were overlooked or because of a miscalculation shouldn’t expect the commissioner to disregard them.
Tips: It is probably worth asking the commissioner to exercise his discretion, although your chances of success are minimal. (See here).
And it would be a good idea to fully understand about excess contributions so you won’t make them again. (See here)
Small business owners should be aware that contributions of certain proceeds from the sale of eligible small business assets don’t count towards the non-concessional contributions cap up to an indexed $1.155 million (for 2010-11) lifetime limit. This may provide a valuable opportunity to contribute a very high amount in a single year without exceeding the contributions cap.
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