In recent years, when presenting to investment forums on DIY super, I often use the term ‘ten commandments’ as a tool to help the audience grasp the major rules that apply to self-managed super funds (SMSFs). Here are what I consider to be the ten commandments of DIY super.
1 You shall . . . always remember you’re in control
If you put in the time to understand the rules, and seek advice when necessary the prospect of complying with the superannuation laws shouldn’t deter you from running a SMSF.
If you do find the compliance side too overwhelming, you can delegate some of the tasks, but not the responsibility, to service providers, or in extreme cases, you can wind up your SMSF.
Note: Outsourcing your obligations doesn’t remove your ultimate responsibility as trustee of your own fund. You may choose to hire a company to look after your administration and compliance; but, in the end, you’re responsible for what happens in your fund.
2 You shall. . . comply with the sole purpose test
In the SMSF trustee declaration that new trustees must sign, the trustee declares that he understands ‘. . . it is my responsibility to ensure the fund is maintained for the purpose of providing benefits to its members upon their retirement (or attainment of a certain age), or for beneficiaries if a member dies’.
If you enjoy a direct or indirect benefit before retirement from your SMSF’s investment, that is, more than an incidental or insignificant benefit, your fund is probably breaching the sole purpose test.
3 You shall. . . follow your fund’s trust deed
The trust deed is your SMSF’s rule book. As a SMSF trustee, you must act in accordance with your trustee responsibilities as set out in your fund’s trust deed. If that document isn’t enough incentive, the Superannuation Industry (Supervision) Act 1993 (the SIS Act), the main legislation governing super, expressly states that the trustee of the fund must comply with all of the trust deed provisions and penalties for non-compliance apply if you don’t.
4 You shall. . . comply with the SIS Act
The superannuation laws are set out in the SIS Act, and the Superannuation Industry (Supervision) Regulations 1994. A SMSF, as with all super funds, must comply with the SIS Act and regulations, including the following rules:
• Contribution rules. You must satisfy the contribution rules, for example, if a member is aged 65 or over they must satisfy a work test before contributing.
• Investment rules. You must satisfy special investment rules. See the fifth and sixth DIY super commandments.
• Benefit payment rules. You must not breach the payment rules when paying a lump sum or pension, for example, a SMSF member must satisfy a condition of release to access preserved super benefits.
• Administrative obligations. Your fund must meet its administrative obligations such as preparing minutes of trustee meetings and decisions, and keeping accounting records — including recording all contributions, expenses, tax paid, investment transactions and other transactions throughout the year.
5 You shall. . . formulate an investment strategy
The super laws demand that trustees formulate and implement an investment strategy. Section 52 of the SIS Act states that when formulating your strategy you need to take into account:
• 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.
6 You shall. . . not break any investment rules
Besides the requirement to create an investment strategy for your SMSF, you must also ensure your SMSF doesn’t breach any of super’s special investment rules. The SMSF trustee declaration that new SMSF trustees must sign clearly lists these rules as follows:
• Ensure your SMSF meets the sole purpose test
• Keep personal money separate from SMSF assets
• Protect the ownership of fund assets
• Don’t lend money or provide other forms of financial assistance to fund members or relatives of fund members
• Don’t purchase assets from fund members, unless those assets are listed securities, business real property or managed funds
• Don’t borrow money on behalf of your SMSF, unless it falls within one of the exceptions
• Don’t have more than 5 per cent of the fund’s total assets as in-house assets. An in-house asset is a loan to, or investments in, related parties of the fund, or a lease arrangement with related parties
• Ensure any fund investment is made on an arm’s length basis.
7 You shall. . . arrange for your SMSF to be audited
The SIS Act states that trustees of a SMSF must appoint an ‘approved auditor’ in each income year to audit the fund’s operations of the fund, and that the auditor must provide the trustees with an audit report in the approved form. You can only appoint an approved auditor to conduct these audits. An approved auditor can be a registered company auditor or a member of one of the accounting bodies.
8 You shall. . . lodge tax and compliance returns
Your SMSF must lodge a return each year with the ATO on or before the due lodgement date. When lodging your fund’s return, you also must pay the annual supervisory levy of $150.
9 You shall. . . keep your fund separate from your personal finances
You wear a very distinctive cap when you take on the role of SMSF trustee — you act on behalf of fund members, including yourself. Legally, your role as a SMSF trustee is different from your role as fund member, which means you must manage your SMSF separately from your personal and business affairs.
10 You shall. . . seek professional advice, when necessary
You shall seek professional advice before you set up your SMSF, and seek advice on an ongoing basis, when necessary:
• Even if you choose to do everything yourself, advice at the outset and regular chats to a chosen adviser are essential.
• Even if you choose to use that adviser as a coach or mentor, instead of getting him or her involved in the nuts and bolts of your fund.
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