I went to the SMSF Conference last week and good news… not much happened. There is a bit of a change in the government’s language, and they seem to be reframing the tax savings you get in super as a ‘tax cost to the government’ rather than a way to reduce the impost of the aged pension on the government budget… I may be reading into things that aren’t there though… time will tell.
The two big news stories in SMSF land are:
- SMSF RETURNS ARE REALLY STRONG
- INVESTMENT STRATEGIES ARE ACTUALLY IMPORTANT
- DON’T DO DODGY STUFF WITH WASH SALES
Great News About Your Fund’s Performance 🎉
I’ve got some exciting stats to share that might make you feel pretty good about your SMSF decision! (I don’t care what anyone says… stats are exciting!)
The Big Picture: SMSFs Are Crushing It!
SMSFs have been outperforming the big APRA funds over the last five years (up to June 2023). We’re talking a solid 6.5% return compared to 5.3% from the bigger funds. That’s a nice 1.2% extra in our pocket!
This isn’t just a small study either – it’s based on data from 421,000 SMSFs (that’s about 69% of all SMSFs out there).
A Bit of a Mixed Bag Last Year
Now, full disclosure – last year (2022/23) was a bit interesting:
- SMSFs overall: 6.6% return
- Big APRA funds: 8.4% return
Why the difference? We think it’s because SMSFs were a bit shy on international shares. But here’s the cool part – the top SMSFs still knocked it out of the park with 11.6% returns!
Size (And Advice) Matters!
Here’s something to think about:
- Big SMSFs (over $200k): Scored a sweet 7% return
- Smaller SMSFs: Only managed 0.4%
And get this – if you’ve got a professional advisor in your corner:
- Advised funds: 7.6% return
- DIY approach: 6.4% return
What This Means for You
- Got a Smaller Balance? It might be worth thinking about growing it or getting some professional help to boost those returns (or winding it up)
- Flying Solo? The numbers suggest getting an advisor could give your returns a nice kick. Just saying! If you need a referral to a financial advisor give me a call Contact us here
- Thinking Long Term? You’re in the right place! SMSFs are showing they can deliver the goods over the long haul.
- Review your investment strategy to make sure it’s appropriate
Speaking of investment strategies, one of the biggest court cases revolving around investment strategies happened in the last 12 months…
When ‘Ordinary’ Transactions Can Lead to Extraordinary Problems
What happened?
The Gordon Merchant Superannuation Fund purchased listed securities at market value from the Merchant Family Trust
Nothing to see here right? The SMSF has the ability to acquire listed shares at market value from a related party.
Wrong!
Despite being at market value, the ATO found multiple contraventions of superannuation law. This case serves as a wake-up call for all trustees.
Here’s the plot twist: The ATO wasn’t happy because the main reason for buying the shares wasn’t about retirement savings – it was actually about creating a tax loss in the family trust. Oops!
He tried to argue that from an SMSF trustee point of view it made sense to do it but… you guessed it – it didn’t match with his investment strategy! And even if it did match the template of the investment strategy, there would have been no reasoning as to why investment was made.
The big lesson? Just because something looks totally fine on paper (like buying shares at market value), doesn’t mean it’s okay if you’re doing it for the wrong reasons. Your SMSF investments need to be all about those retirement goals – not about helping out other entities or family members with their tax situation.
The ATO tried to throw the book at him – and succeeding in the main in doing so. The only thing he successfully appealed to was being disqualified as a trustee.
Quick tip: If you’re thinking about doing any transactions between your SMSF and related parties (even totally normal-looking ones) beware!
- Investment Strategy Breach
The AAT found the fund:
- Failed to give effect to its investment strategy
- Made investments without genuine purpose
- Didn’t consider required matters outlined in the investment strategy
- Sole Purpose Test Breach
The transaction failed because:
- The predominant purpose was crystallizing a capital loss in the family trust
- Retaining economic ownership within the broader group was a substantial purpose
- Neither purpose aligned with the core retirement purposes required by law
- Financial Assistance Breach
The tribunal determined that:
- Financial assistance was provided to Mr. Merchant as a beneficiary of the family trust
- The law prohibits financial assistance even when provided through intermediaries like discretionary trusts
Important Lessons for All Trustees
- “Ordinary” Doesn’t Mean “Compliant”
Just because a transaction appears routine (like buying listed shares at market value), doesn’t mean it’s automatically compliant. You must consider:
- The broader context of the transaction
- All purposes behind the investment decision
- How it aligns with your investment strategy
- Documentation is Critical
Ensure you:
- Actively consider and document how each investment decision aligns with your strategy
- Record your decision-making process in trustee minutes
- Keep evidence of your consideration of risk, return, and diversification
- Get Professional Advice – But Choose Carefully
The Merchant case revealed that:
- The transaction was suggested by the Family Trust’s accountant – the SMSF didn’t get advice! If you’re doing a related party transaction it must make sense when you are wearing both hats – your SMSF trustee hat and your related party hat.
Practical Steps to Protect Your Fund
- Review All Related Party Transactions Even if at market value, scrutinise any transactions involving related parties for potential compliance issues.
- Document Your Purpose Clearly record the retirement purpose behind each investment decision.
- Regular Strategy Reviews Actively review and update your investment strategy, ensuring all investments align with it.
- Multiple Advisory Perspectives Consider getting a second opinion on complex transactions, especially those involving related parties.
Silver Linings from the Case
The AAT ultimately set aside Mr. Merchant’s trustee disqualification because:
- There was no evidence he knew the transaction risked breaching the law
- The contraventions related to a single course of conduct
- He provided undertakings to prevent future non-compliance
- He was deemed to be a fit and proper person
However, trustees should not take comfort in this outcome – preventing breaches is always better than remedying them.
Looking Ahead
This case demonstrates that SMSF compliance is becoming increasingly complex. What seems like a straightforward transaction may have hidden compliance risks. The key is to:
- Be vigilant with all transactions, especially those involving related parties
- Maintain comprehensive documentation
- Regularly review your fund’s compliance
- Seek appropriate professional advice
WASH SALES
A final word on wash sales… if you are selling something just to crystallise a loss… this is classic Part IVA – tax avoidance… just don’t do it.
If you are rebalancing a portfolio and there are some shares you don’t want any more, that is ok… but tax can’t be the reason.
If you are selling investments from a related party to another the ATO and not changing the overall investment allocation between the two entities the ATO will rightly question as to your motives… and you better have a very good reason for doing it! If you are doing this make sure the justifications are minuted and match the investment strategy.
OK that’s probably enough for this time – I don’t want to bore everyone too much – but next time maybe I’ll touch on the exciting developments in Death versus member benefits. It’s really riveting stuff!!!
Speak soon,
Daniel
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