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SMSF trustee declaration: a quick guide

Trish Power — Thu, 29 Oct 2009 00:06:29 +0000

When setting up your SMSF, you must sign a SMSF trustee declaration that confirms you understand the responsibilities and duties involved in running a SMSF.

If you have set up a DIY super fund in the past 18 months or so, then you would be familiar with the SMSF trustee declaration.

A new trustee of a new or existing SMSF must sign a trustee declaration within 21 days of becoming an SMSF trustee stating that you ‘understand my duties and responsibilities as a trustee or director of the corporate trustee of the self-managed superannuation fund named on this declaration . . .’.

The declaration is a curious document because its purpose is simply to confirm that you understand your responsibilities as fund trustee. As trustee, you’re still subject to these responsibilities even when you don’t sign the document. If you don’t sign the trustee declaration, however, you may be subject to penalties. More seriously, if your fund breaks the super rules, you (or your fund) can be subject to very serious penalties.

TIP: If you commenced your SMSF trusteeship before July 2008, then you won’t have signed such a declaration, but that doesn’t mean you shouldn’t be aware of what’s contained in such a document. The SMSF declaration is a very handy reminder of your responsibilities as a SMSF trustee, and I suggest that every trustee should obtain a copy. You can download a copy from the ATO website (publication number: NAT 71089), or you can find a copy of the declaration in my book, DIY Super For Dummies.

Before you sign the trustee declaration, you must read the ATO fact sheet ‘Self-managed super funds — key messages for trustees’ (NAT 71128). The fact sheet states that you’re responsible for managing your fund, and that you must understand your trustee duties and responsibilities, which include:

Ensuring your SMSF is maintained for the purpose of providing retirement benefits, which is more commonly known as meeting the sole purpose test.
Drafting the fund’s investment strategy and making investment decisions.
Accepting contributions and paying benefits.
Appointing an approved auditor for each income year.
Lodging annual returns with the ATO and keeping fund records.

How to sign the SMSF declaration…

When signing the SMSF trustee declaration, you must ensure you insert the full name of your fund at the beginning of the declaration. You must then sign and date the declaration on page 2 of the form, and ensure you have a witness to your signature who also signs and dates the form. Your witness must be aged 18 years or over.

SMSFs and overseas property

Trish Power — Wed, 28 Oct 2009 09:35:20 +0000

Q: Since we can now use super to purchase real estate, is this also true for property in the United States? Can you provide me with some guidance on how I could find out the process and correct entities to form to do this? Thanks.

Trish’s response: Before I answer your question, I need to clarify your comment about now being able to use a super fund to purchase real estate. Superannuation funds, including self-managed super funds (SMSF), have always been able to invest in direct property. The big change is that the Government now permits SMSFs to use a special type of gearing structure to invest in property which means in certain circumstances, a SMSF doesn’t need the full purchase price to invest in real estate, or to invest in any other allowable investment.

A SMSF can in invest in all types of property such as indirect property investments, direct property (residential, commercial, industrial and rural) and property located overseas.

Anyone considering such an investment should seek out professional advice and if a SMSF is considering a particularly complex strategy, then perhaps a call to the technical experts at the ATO may be in order.

In theory there are no special rules applicable to direct overseas property but a few issues come to mind, including the following:

Documentary evidence that a SMSF owns the overseas property, and that the fund ownership is recognised in the country where the asset is located.
Any investment must still be consistent with the sole purpose test, which means, for example, a residential property located in the United States could not be leased to a fund member or relative of a fund member
Any investment needs to be considered against the potential risk and return of the investment, and the cash flow needs of the fund. For example, a viable return for such an investment would also need to take into account the cost of any flights to inspect the property, and consider the risk that such overseas trips may be more closely investigated by the ATO as a possible breach of the sole purpose test.
A fund’s auditor may need special documentation to verify the existence and ownership of the asset

You also ask for some information on the process to purchase overseas property and the entities necessary to proceed with such an investment. At this stage, our website cannot provide you with a list of overseas property specialists that are located in Australia, or located overseas. As a preliminary step, I suggest you speak with a financial adviser or accountant who knows a lot about SMSFs to confirm that your fund is in a position to consider such an investment, and the compliance process involved from a SMSF point of view.

SMSFs: Purchasing options is OK, and even sometimes CFDs

Trish Power — Fri, 23 Oct 2009 10:10:00 +0000

Q: Can a SMSF buy/sell call/put options? I understand that CFDs are not permitted because it breaches the charge over asset regulation. However, is that true that options are derivatives and in giving shares as a collateral (when writing options) to the Options Clearing House, it will treated differently (an exemption) as long as the SMSF has a derivatives risk management statement?

Trish’s response: Before I answer your question about options, I need to clarify your comments about contracts for difference (CFD). In certain circumstances, the Australian Tax Office has indicated that CFDs are allowable investments for self-managed super funds (SMSFs), provided that cash is used as collateral for any margin payments on the contract, rather than using fund assets as collateral. Now, in my view, cash is a fund asset, and I’m surprised that the ATO has taken this view on CFDs but there you have it, although I would be closely following the ATO’s views if any SMSF trustee is considering using CFDs within his or her fund. (If you want to read more about the ATO’s view on SMSFs and CFDs, check out the ATO website).

In response to your question on options: Derivatives, such as options, are allowable investments for a SMSF, subject to certain conditions, including:

ensuring that the fund’s investment strategy (and trust deed) permits the SMSF to purchase options and
the fund has a derivative risk statement, that is a statement that explains the SMSF’s risk management policies when using derivatives.

For the most part, options are used as a hedging tool to minimise the volatility in an investment portfolio, although some investors use options as a pure trading tool for profit. Any SMSF trustee considering using options within a SMSF portfolio needs to confirm the use of such instruments with the ATO and/or with the fund’s adviser.

Note: Anyone considering derivatives within a super fund should also read Regulation 13.15A of the Superannuation Industry (Supervision) Regulations 1994, for some background on the use of collateral and derivatives.

Trish’s ten commandments of DIY super

Trish Power — Mon, 29 Jun 2009 12:12:26 +0000

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.