Weigh the pros and cons before making your fund a family affair.
I’ve never been much of a fan of children joining their parents’ self-managed superannuation fund (SMSF). Family disagreements and personal preferences can cause severe problems for an SMSF.
And I’ve always taken the view that employers who don’t pay super guarantee (SG) contributions after they’ve been nicely asked to fix the problem should be reported to the Australian Taxation Office (ATO).
That’s the theory. How have these two views fared in my own life? I regret to say, not so well.
Retail or industry super?
My daughter has started her second year at university. For the past year, she has worked part-time at a local cafe. Now that she has some income, the issue of employer super has come up. At the rate she’s going, it’ll take at least five years before her account balance reaches A$10,000.
Until she reaches that threshold, by my reckoning, all retail and industry super funds are too expensive. Most industry super funds charge A$1.50 per week or A$78 per year. They also charge about a 0.9 per cent per annum investment management fee. On the face of it, these fees seem pretty reasonable. And in truth, given the potential amount invested, we’re not talking sheep stations.
But with a A$2000 account balance, these fees are 4.8 per cent per annum. With a A$5000 account balance, total fees are 2.5 per cent per annum.
Super funds offered to the public must be fair to all fund members. Also, you would expect that people with lower account balances probably cost more to have on the books than the fees they earn, so while these percentages are high, they are not unreasonable.
The SMSF solution
I don’t think setting up an SMSF for her makes sense. Her account balance is too small, so her contributions would be eaten up by fees. In any case, she can’t personally afford the setup costs and while we, as parents, could fund the establishment, we think this sets a bad precedent. Moreover, she freely admits she doesn’t know enough about investing money so having total responsibility isn’t really acceptable.
Ultimately, the only logical solution seemed to be that she should join our SMSF. She’s become our third member and trustee director. We’ve had to organise the fund’s bank account so that all three of us sign cheques.
This isn’t a problem for our family, but could be a problem for some (see “A warning”, below). For us, the biggest problem has been getting her employer to pay her super which, sadly, I don’t think is a unique issue.
Extracting SG from recalcitrant employers
Since she started work, my daughter’s employer hasn’t been that flash at meeting their SG obligations. I’ve given her tips on how to quietly get that money out of them. I even asked our accountant to write to me asking where the employer contributions were, given the fines that will apply if the contributions aren’t made on time. This solved part of the problem for one lot of super contributions – when the employer made a large catch-up contribution – but, since then, her employer has simply ignored the SG quarterly deadlines and her gentle verbal reminders.
Her job roster is very flexible and if she pushes too hard she can be frozen out of future work. So hitting the employer hard carries the risk that she’ll lose her job, which she can’t afford because the employment market for low-skill workers is pretty poor.
To make matters worse, her employer changed hands and the former owner still hasn’t paid anything. We have to find the former owner and make contact with the ATO. It’s a nasty conundrum for her and one that I think is fairly common. But I hate to think what would happen if she didn’t have us, and our experience with the superannuation system, behind her.
While I’ve detailed above the conditions under which the best outcome was to add a child to an SMSF, there are obviously exceptions.
The case of AAT Decision of Triway Superannuation Fund and Commissioner of Taxation  AATA 302 shows that when things go wrong, they can go horribly wrong.
The Triway Superannuation Fund had three members, a couple and their son. The son was unfortunately a drug addict and also became a bankrupt in 2006 (the fund was set up in 2002), which effectively made him a disqualified person but he was not removed as trustee.
He also misappropriated over A$40,000 of the fund’s money, less than 12 months after the fund was established.
The fund’s status was hidden from the ATO for five years, which eventually made it non-compliant in 2008. The fund appealed to the Administrative Appeals Tribunal to revoke that decision, but was unsuccessful. It therefore has penalties as well as additional tax to pay.
No one knows what another person will do in the future or what causes anyone to take something valuable without asking permission. SMSF trustees have to be prudent. I’ve tried to insulate my wife, daughter and myself from this potential problem by making us all signatories of our SMSF’s bank account. Interestingly, our bank’s online system isn’t sophisticated enough to require three authorisations before it completes a debit transaction.
A motivated person will find ways around these steps so vigilance is essential. It’s always a good idea to be mindful of the worst-case scenario when dealing with the other trustees of your fund.
Tony Negline has worked in financial services for over 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees. He and his wife have been married for more than 20 years and have two daughters and two sons. They live in Sydney and have run their own self-managed superannuation fund since 2003.