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Can's & Can'ts of SMSF

It is important for SMSF trustees to possess a detailed working knowledge of the key superannuation investment laws, which are broadly designed to protect a member's superannuation benefits. Self-Managed Superannuation Funds are not suitable for every investor due to the level of responsibility, compliance and administration required.

Investment Laws

A trustee of a Self-Managed fund must act in accordance with:

  • The clauses of the superannuation fund trust deed (governing rules);
  • The provisions of the Superannuation Industry (Supervision) Act 1993 (SIS); and
  • The general rules, for example those imposed under tax law and trust law.

One of the most critical responsibilities for the trustee relates to compliance with SIS regulations, which include:

Sole Purpose Test

The Sole Purpose Test broadly requires that a superannuation fund must be maintained solely for the purpose of providing retirement benefits to members or their dependents in the case of a member's death.

Trustees who breach the Sole Purpose Test face civil and criminal penalties. It can result in a fine of up to $220,000 and 5 years’ imprisonment for individual trustees and may result in the fund losing its complying status. Higher penalties apply to corporate trustees.

Investment Strategy

Trustees must formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the fund, including, but not limited to:

  • Risk and return of investments;
  • Diversification of assets;
  • Liquidity and cash-flow requirements; and
  • The ability of the fund to discharge its liabilities.

An investment strategy is a written plan for making, holding and realising fund assets within the stated investment objectives of the fund. These objectives should be specific, measurable, agreed in writing, realistic and achievable (Section 52(2) SISA).

Arm's Length Requirement

'Arm's length' refers to the manner in which a transaction is conducted rather than the relationship between the parties. As such, a superannuation fund can transact with a related or associated party so long as it does so in an arm's length manner, which requires market pricing and possibly independent valuations.

Borrowing by Superannuation Funds

Superannuation funds are prohibited from borrowing except under certain specific circumstances:

  • Within limited recourse borrowing type arrangements;
  • For no more than 90 days to meet payment of member benefits or surcharge liability;
  • For no more than 7 days to settle acquisition of securities

In-House Assets

An ‘in-house asset' is a loan to, an investment in, or a lease with, a related party of the fund. A superannuation fund may not invest in an in-house asset where such an investment would increase total in-house assets beyond 5% of the market value of the fund's assets. A related party can be described as a member of the fund or an associate of an entity of the fund.

Acquiring Assets from Members

Superannuation funds are prohibited from acquiring assets from members or member's relatives except where the asset is:

  • An in-house asset and would not result in the level of in-house assets of the fund exceeding 5% of the fund's assets;
  • A listed security; or
  • Business real property;
  • Widely held unit trust; and
  • Acquired at market value.

Business Real Property

Business real property' relates to land and buildings used wholly and exclusively for business purposes.

Prohibiting loans or financial assistance to members or relative

The trustee or an investment manager of a regulated superannuation fund must not lend money or give any other financial assistance using the resources of the fund to a member or a relative of a member of the fund. The definition of relative, in relation to an individual, means, a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that individual or of his or her spouse; or the spouse of that individual or of any other individual specified in proceeding sentence.

Administrative Obligations

There is a range of administrative obligations imposed on self-managed superannuation funds (SMSFs) under the law. Trustees are responsible for ensuring these obligations are met. Failure to do so may jeopardise the fund's eligibility for tax concessions or result in penalties being imposed on the trustees.

a) Annual income tax and regulatory returns

All SMSFs have needed to lodge only one combined income tax and regulatory return with the Tax Office. This return covers both the income tax and regulatory lodgement requirements of the SMSF.

b) Supervisory Levy

Trustees of SMSFs must pay the annual $150 supervisory levy to the Tax Office upon lodgement of their combined annual return. The fund will not be invoiced for the amount of the levy payable. The levy must be paid separately from any tax due.

c) Annual Audit

All SMSFs are required to have the financial accounts and statements of the fund audited each year by an approved auditor. An approved auditor may be a registered company auditor or a member with one of the Australian Society of Certified Practising Accountants; The Institute of Chartered Accountants in Australia; National Institute of Accountants; Association of Taxation and Management Accountants or The National Tax and Accountants Association Ltd.

Auditors are obliged to bring to the attention of trustees any concerns about the fund's financial position or with the fund's compliance with the law. If an auditor is not satisfied with the action taken by the trustees to rectify the problem, then they must inform the Tax Office of the problem.

d) Winding Up

If the fund is wound up, trustees should ensure that all requirements imposed by the fund's trust deed (if applicable) plus all taxation and reporting obligations are met.

e) Record keeping requirements

Under superannuation law, trustees of SMSFs are required to:

  • keep accurate and accessible accounting records that explain the transactions and financial position of the fund for a minimum of 5 years;
  • prepare an annual operating statement and an annual statement of the fund's financial position and keep these records for a minimum of 5 years;
  • prepare minutes of trustee meetings (where matters affecting the fund were discussed), and prepare records of all changes of trustees and member's written consent to be appointed as trustees. Each of these documents must be kept for a minimum of 10 years;
  • keep copies of all annual returns lodged for a minimum of 5 years;
  • keep copies of all reports given to members for a minimum of 10 years.

Poor and inadequate record keeping has been identified as a major problem for SMSFs. Trustees need to give this area detailed attention, as this can pose a compliance risk for funds.

Non-Compliance of a Self-Managed Superannuation Fund

There are strict penalties levied by the Australian Tax Office if a Self-Managed Superannuation Fund is found to have breached the governing rules. These penalties include fines and gaol terms for the trustees and loss of up to 45% of the superannuation fund assets as a taxation penalty.

It is therefore very important that if you do not understand your responsibilities as trustees or believe that your fund may have broken the rules that you seek professional advice as soon as possible to address the situation and act efficiently to rectify any problems.

Trustee Discretion & Binding Death Nomination

Self-Managed Superannuation Fund trustees are responsible for the paying of death benefits from the fund when a member dies. As a result, it is very important that elections are made as specified within the trust deed by members of the fund as to their wishes as to how their benefits will be paid on their death.

These nominations will be binding on the trustee if the trust deed has been amended to allow this. Binding death nominations allow the fund member to direct how their superannuation benefits should be distributed upon their death.

From an estate planning perspective, it is important to ensure that these are in place as the failure to plan can be extremely costly from a tax planning point of view and in situations of family litigation or in separated families.

Once a SMSF member has made a Binding Death Benefit Nomination, it does not automatically lapse after 3 years if it is not renewed or updated, as opposed to a nomination in other superannuation funds that generally lapse after 3 years.