Self Managed Super Fund’s (SMSF) have become increasingly popular in recent times as people seek to take greater control over their retirement savings.
Despite often being referred to as ‘DIY Super’ – there are many aspects to establishing and running an SMSF that require qualified professional assistance to ensure the rules and regulations that govern the SMSF space are adhered to. Engaging quality experienced third parties is vital as the ultimate responsibility and liability in relation to the fund will always lie with the trustees of the fund. So make sure the advice you rely on is correct!
Here are some fundamental basics in relation to self managed super fund’s that as a minimum, you should be aware of should you be considering the DIY option.
An SMSF is a form of trust and therefore requires a trustee. The trustee is the legal owner of the assets of the fund and is responsible for making all the decision relating to the fund. This role can be held either by individuals or a company.
An SMSF can have up to four members. If you decide to have individual trustees, all members must be trustees. If you decide on a corporate trustee, then all members must be directors of the company.
An SMSF may have only one member. If a single member fund decides to have individual trustees, they must appoint a non-member individual to also be a trustee. They have the same role and responsibility as the trustee who is a member of the fund. A single member fund with a corporate trustee need not involve another as they can be the sole director and shareholder of the company.
Whilst a corporate trustee structure appears more expensive in the first instance, over the life of the fund it presents a much more efficient and effective set up than using individual trustees.
The Rules – Deed & The SIS Act
Each SMSF has a deed that sets out the rules the fund must comply with. The SIS Act and Superannuation Industry (Supervision) Regulations also must be followed. The deed should be regularly reviewed and updated as changes in law may allow for certain activities within an SMSF, but if the deed prohibits this, the trustees must comply with the deed.
Reporting & The Regulator
The Australian Taxation Office (ATO) regulates the SMSF sector. There must be a set of financial statements and tax return prepared annually for a fund, and these must be independently audited. The audit must be conducted by an auditor who is registered with ASIC.
Once audited the annual return of the fund needs to be lodged with the tax return by the applicable due date. If the fund is newly established, its first tax return must be lodged by 28 February following the end of the applicable financial year. Future returns after the first one have a due date of 15 May. If the last return lodged on behalf of the fund was late, the fund must lodge its next return by 31 October.
The ATO are concerned by the number of funds that have outstanding lodgement obligations. So in addition to the 31 October lodgement deadline, they are removing ‘regulation details’ of the funds complying status on the ATO’s external register of SMSF’s, ‘Super Fund Lookup’ Without these details employers will not pay super guarantee contributions into the SMSF, and other superannuation providers will not rollover funds. And once lodgements are brought up to date, it can take up to another month before the regulation details are updated on the register. A very powerful tool indeed for the tax office in dealing with Trustees who are not keeping up with their responsibilities.
The Sole Purpose Test
If you plan to have an SMSF it is incredibly important you understand the concept of the ‘sole purpose test’. That is, that the fund is maintained for the sole purpose of providing benefits to its members upon their retirement (or attainment of a certain age), or for beneficiaries if a member dies.
This test must be applied to every decision made by the trustees on behalf of the fund. It also means that if in any way, a direct or indirect benefit is enjoyed by a member (or its related parties) due to an SMSF investment, and this enjoyment is more than ‘incidental or insignificant’ there has been a breach of the test.
A breach can result in a fund being declared non-complying. A non-complying fund loses its tax concessions and the market value of the fund’s assets less any non-concessional contributions are taxed at the highest marginal rate of tax.
The trustees formulate and implement an investment strategy for the SMSF. Regulations stipulate the strategy must include:
- Likely risk and return of any investment
- The fund’s investment objectives
- Diversification — investing across a broad range of assets, and any risks from investing in a small number of assets, or a single asset
- Liquidity — the ability of the fund to pay taxes, expenses and members’ benefits.
Note that the strategy should be reviewed and updated regularly. The auditor will be looking to ensure that any investments decisions made by the SMSF adhere to the strategy.
Investments rules specific to SMSF’s
There are many investment rules that are unique to the SMSF environment, and its ignorance to these rules that so often catch trustees out.
People aren’t familiar with the fact that assets held within an SMSF cannot be dealt with and used in the same way the same asset can be used if it is held in a family trust, investment company or personally.
Some of the common yet often misunderstood (or not known at all!) rules include:
- Assets cannot be purchased by an SMSF from its members (or a related party), even if done so at market value. This includes residential properties.
The exception to this rule is listed shares, managed funds and commercial property.
- There is to be NO personal use of SMSF assets by its members or anyone related to them. So, you can’t purchase a residential property in your SMSF and rent it to your children, parents etc. Even if they pay market rent.
The only exception is Business Real Property, which can be leased by a member or a related party. This must be conducted on commercial terms.
- SMSF’s are strictly prohibited from lending, unless under one of the prescribed exceptions, such as Limited Recourse Borrowing Arrangements. The concept of ‘lending’ goes further than just the traditional notion of what ‘lending is’. For example, contributing monies to assist with the purchase of a property when the fund is first established, and then reimbursing yourself when the rollovers are banked is considered lending.
- Keep the assets of the fund clearly separate to that of personal assets. This includes ensuring all assets are held in the correct name, ‘trustees name(s) as trustee for the name of the SMSF’.
- The sole purpose test should be considered and met with every investment decision.
- Do not breach the ‘in house asset test’ – that is, ensure that no more than 5% of the value of the fund is represented by loans to, or investments in related parties of the fund.
- All transactions should be conducted on an ‘arm’s length’ basis.
The appeal of SMSF is the ‘do it yourself’ factor. However, by running through just the ‘basics’ of having an SMSF it should be obvious that this space is a complex one.
Yes, you gain control, but you also have a raft of rules and obligations to meet. Don’t let this put you off! Get informed and understand what is involved. This is quite easy to do as there are many useful reputable resources online, starting with the tax office website. Do some research and partner with an SMSF specialist to assist you with the reporting, compliance and administration obligations. You get what you pay for, so don’t just look for the cheapest option. But in saying that, you shouldn’t have to pay a fortune for quality assistance. Most importantly, ensure you are completely comfortable in taking on the responsibility of looking after your own super, and be willing to continually spend time staying on top of the ever-changing rules and regulations, as failure to do so can have serious consequences on when, and how much you have to retire on.
Kimberlee Brown is H&R Block Tax Accountant’s SMSF Director. She is a CPA and SMSF Specialist Adviser with over 15 years of experience in the Self Managed Superannuation Fund industry. H&R Block Tax Accountant offers a full range of SMSF solutions from fund establishment to helping you meet your annual compliance and taxation obligations.
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