So, you've made the decision to open a self-managed superannuation fund (SMSF) and take charge of your financial destiny.
Congratulations.
But there's a heap you need to know in your journey towards hoped-for financial independence, including understanding the contents of the Trustee declaration which you must sign within 21 days of becoming a trustee.
You do know about this, don't you?
Investing in listed shares on the ASX via an SMSF should be a wonderfully simple strategy and, at first glance, it appears difficult to see how trustees could get into trouble with the ATO over regulatory breaches. But, unfortunately, many of them do.
Hopefully, you're not one of them.
What I want to discuss here today are two of the main danger areas that some trustees in the accumulation phase find themselves in when investing in shares via their SMSF.
Diverting your SMSF's cash
I've read of instances in the past where well-meaning trustees wished to either take advantage of higher interest rates at another bank, or benefit from a foreign exchange platform selling its services with low fees and fantastic exchange rates.
Except for the fact that these other product providers are in the name of the individual, and not the SMSF.
Just because you've transferred SMSF monies to a personal bank account with a higher interest rate — and it was your plan to transfer the funds back to the SMSF's bank account after a period of months — this doesn't mean your SMSF's auditor won't most likely be forced to report the matter to the ATO for potential compliance action.
Likewise with the foreign exchange.
Transferring money to a foreign exchange platform in your personal name, before moving the money to an overseas broker in the SMSF's name afterwards, is not a good idea, and are transactions that the ATO may want to examine closely if it came to an audit.
Another big mistake some trustees make is, for example, buying shares in high dividend payers like the Commonwealth Bank of Australia (ASX:CBA), but accidentally — or deliberately — directing the dividends owing to the SMSF to a personal bank account.
I'm afraid to say that if you personally collect dividends owing to the SMSF, things aren't going to end well. Don't get caught doing this either!
Confusing who owns what
If you decide to go down the path of using a corporate trustee — which is recommended — it'd be easy to simply use an existing company, if you have one.
Failure to document your correct ownership of shares in the CBA, Altium Limited (ASX:ALU) and Kogan.com Ltd (ASX:KGN), for example, means there could be confusion as to who owns what shares.
If your lawn mowing company — with its own assets and liabilities — is also the legal owner of your SMSF's assets (as trustee for your SMSF), you'd better ensure ownership documentation and naming conventions are both accurate and complete.
For example, 'Lorraine's Lawn Mowing and Gardening Pty Ltd' will need to ensure that the SMSF, documentation and all assets are in the name of 'Lorraine's Lawn Mowing and Gardening Pty Ltd ATF The Lorraine Super Fund'.
That way the SMSF's assets will be kept separate from the company's other assets such as gardening tools, lawn mowers, trailers, the company car, office equipment, and so on — a very important matter for protecting SMSF assets from creditors and, again, potential compliance action from the ATO.
It's actually better to have a separate special-purpose company. Not only will the SMSF's ownership of shares and other assets be assured, ASIC also provides heavily discounted fees for such companies, and it is recommended as the preferred way to go if you're establishing a corporate trustee.
Foolish takeaway
Investing in listed shares via the SMSF structure is a fantastic wealth creation strategy in the right hands.
Your SMSF's bank account will accept your personal and employer contributions over many years allowing you the opportunity to build investment capital for the very long term, all the time benefiting from the flow of franking credits many Australian companies provide to their investors.
Assuming you can keep your SMSF in tip-top shape and away from regulatory danger zones, we have a list of what we think are outstanding long-term investment ideas that you can read about in our report by clicking on the link below.
