Managing your SMSF within the letter of the law is one of the most important things you can do for your fund.
Here are the essential facts that every SMSF administrator must know before they start running their fund.
Understand what is involved
An SMSF is a great way of saving for your retirement. But it’s not the easiest. The main difference between an SMSF and other types of funds is that members of an SMSF are the trustees. This means the members of the SMSF run it for their own benefit.
SMSFs are not suitable for everyone, and you should think carefully before deciding to set one up. It is a major financial decision, and you need to have the time and skills to do it.
Comply with the sole purpose test
Any investment you make through your SMSF must pass the sole purpose test.
If you buy a property, it must only be purchased for the sole purpose of providing super benefits for your members when they retire – anyone related to a self-managed super fund must not use its assets.
So if you plan to buy a holiday house so that your family can use it each summer and rent it out the rest of the time – think again. This would mean you’re receiving a benefit from your asset, which means you’ll fail the sole purpose test.
Other investments such as art or wine (collectables) must be approached with caution. You need to make sure that SMSF members are not granted use of or access to, the assets of the SMSF as this too would fail the sole purpose test.
You must have an investment strategy
Your investment strategy should outline the retirement goals and circumstances of every fund member. It will help you to manage your investments and be useful if your investment decisions are ever questioned.
Law requires that your SMSF’s investment strategy includes:
- Investment risks, expected return and cash flow requirements.
- Diversification of investments and whether your SMSF could be exposed to losses because it has only invested in a few assets.
- Liquidity – will your SMSF have access to cash to meet its obligations.
- Evidence to show your SMSF can pay out current and future benefits to its members.
- Do you have adequate insurance for fund members?
What member contributions can be accepted?
Before you can accept a contribution from a member, you’ll need to establish if they’re eligible to make a contribution. Eligibility depends on the member’s age, their employment status and the type of contribution to be made. Trustees are required to allocate super contributions to members’ accounts within 28 days after the end of the month in which they are received.
Your SMSF can only pay a member's super benefits when the member reaches their ‘preservation age’ and meets one of the ‘conditions of release’, such as retirement.
Record keeping and reporting
Good record keeping not only assists you to complete your annual tax returns and manage the day-to-day running of the scheme, but it can also help prevent you from breaching your compliance obligations. The first thing an auditor will ask for is your records.
Here’s a list of the things you should keep records for:
- Minutes of meetings and decisions
- Trustee declarations
- Annual audit records
- Audit reports
- Investment strategies
- Registration documents and ownership and investment documents
- Notices of compliance
- Tax returns
- Operating statements
- Bank account statements
- Tax Management
How your SMSF is regulated
SMSFs are carefully regulated. You may need to deal with three key government agencies:
- Australian Taxation Office (ATO). Administration of superannuation laws.
- Australian Securities & Investments Commission (ASIC). Regulation of financial services to protect consumers. They also register SMSF auditors.
- Department of Human Services (DHA). Assessment of all applications for early release of superannuation on compassionate grounds.
Penalties for non-compliance
“We now have the flexibility to take enforcement action that is reflective of the severity of a breach.” Kasey Macfarlane, Assistant Commissioner, SMSF Segment, Superannuation, ATO
The ATO has been granted authority to investigate and apply appropriate penalties to those who don’t comply with SMSF laws and regulations. They’ll be watching carefully at both the SMSF establishment stage and throughout its operation.
When a trustee is found to have contravened the laws, penalty units will be applied according to the severity of the breach. Penalty units vary from five for failing to comply with an education direction to 60 for breaching lending or borrowing rules. Each unit is valued at $170 to $180 (31 July 2015), so it could be a very costly exercise.
Ask the experts for help and stay on the right side of the rules
Tax laws are complex, and the regulatory authorities are always on the lookout for anomalies, so it's sensible to ask a financial adviser to check your approach.
That way, you can enjoy the benefits of having full control over your financial future and be confident you’re doing things right too.