Read this article to discover the rules in place for SMSF trustees, and discover what you can do to ensure your SMSF operates within the super laws.
If you run a SMSF, then you belong to an influential group that controls a third of all superannuation money held in Australia, and collectively owns just over 14% of the Australian sharemarket! Such an impressive set of statistics becomes even more significant when you discover that this group of Australians – SMSF trustees – represent a mere 4.6% of the Australian population.
SMSF trustees are integral players in the growing superannuation sector, and these Australians are also important to the continuing strength of the Australian Securities Exchange (ASX).
In the federal government’s eyes however, SMSF trustees also take advantage of a big chunk of tax concessions available to Australian super savers. Although many in the industry try to point the finger at SMSF trustees for not investing properly, or for not following the super rules, the investment performance of SMSF trustees is keeping up with the large super funds (see SuperGuide article Large funds outperform SMSFs over 10 years, just), and the rate of non-compliance among SMSFs is relatively low.
Even so, some SMSF trustees have suffered terrible losses from bad investments, and a small percentage of SMSF trustees break one or more of the super rules.
This article takes you through some of the big-ticket compliance items that you need to be mindful of when running your SMSF.
July 2017 super changes mean greater SMSF compliance
A lot has changed for SMSF trustees in recent months, and over the past few years. The most recent significant changes took effect from July 2017 and included the introduction of a $1.6 million transfer balance cap on super savings transferred into retirement phase, the new concept ‘total superannuation balance’, a radical cut in contributions caps, and the removal of the tax exemption on earnings from assets financing a transition-to-retirement pension (TRIP) (for a summary of the July 2017 changes and what you need to be mindful of in terms of compliance, see SuperGuide article Latest superannuation rules: 2018/2019 guide).
The ATO has also released guidance on certain July 2017 compliance issues, in particular, the reporting and valuation requirements related to the $1.6 million transfer balance cap and the total superannuation balance. SMSF trustees need to be aware that the ATO is taking a greater interest in SMSF asset valuations, and for those SMSFs with members in retirement phase, expect a more onerous reporting burden from 1 July 2018 (for a helpful summary of the ATO’s main compliance concerns surrounding the July 2017 super changes, see SuperGuide article Latest super changes: 25-point SMSF guide to ATO’s hot issues).
Harsher SMSF financial penalties
The government introduced a swag of financial penalties, which took effect from 1 July 2014. The financial penalties are imposed on the trustee personally, rather than imposed on the fund balance of the self-managed super fund. Under the new penalty laws you may also be forced to undertake a SMSF trustee course if your trustee skills are not up to scratch. For details on the SMSF penalties, see SuperGuide articles SMSF compliance: Harsher penalties for naughty trustees and SMSF trustees now face bigger penalties (from 2017/2018 year).
Stronger regulation for SMSFs
Since 1 July 2012, stricter operational rules have been in place for self-managed super fund rules forcing SMSF trustees to take special care when considering a fund’s investment strategy, and when valuing the assets of a SMSF.
If you’re planning to save for your retirement via a superannuation fund, then you must follow the superannuation rules to take advantage of these tax concessions. If you plan to take advantage of super’s tax concessions via a SMSF, then you must take on further responsibilities as a super fund trustee.
The stricter operational rules, which took effect from 1 July 2012 (that is, effective from the 2012/2013 financial year onwards), require self-managed super fund trustees to:
- Review investment strategy regularly. You must review your super fund’s investment strategy regularly. You need to review your SMSF’s strategy on a regular basis to ensure that it still meets the needs and objectives of your fund members. According to the ATO, proof of a review may involve documenting any review decisions in the minutes of trustee meetings held during the year.
- Consider the merits of life insurance. You must consider the merits of life insurance for each SMSF member when considering your fund’s investment strategy. This requirement does not mean that you must take out life insurance within your SMSF (see SuperGuide article SMSFs must consider life insurance needs).
- Value your SMSF assets at market value. You must value the SMSF’s assets at market value when preparing financial accounts and statements. The ATO has produced valuation guidelines for SMSF trustees and their advisers. Click on this link to access the guidelines, and for the latest guidance on the issue, see SuperGuide article SMSF asset valuations: Why the ATO is taking greater interest.
- Keep personal assets from SMSF assets or get fined. An unusual but important further change to the super rules is the requirement to keep your personal assets separate from your SMSF assets. This change is unusual because you have always been required to keep your assets separate from your SMSF’s assets (see SuperGuide article SMSFs for Beginners: Trish’s 10 commandments of DIY super), but now this requirement is an operating standard. This change to the legal status of this requirement means that you can now be hit with a fine of thousands of dollars if you break this rule.
Now that you’re familiar with the relatively new SMSF rules, how have you integrated these changes into the day-to-day running of your super fund?
The following SMSF compliance snapshot, what I call your super C-A-R-T, may point you in the right direction.
Driving your super C-A-R-T
Running a SMSF is all about steering your own super CART. I have created the term C-A-R-T for SMSF trustees and it stands for Compliance, Administration, Reporting and Tax management responsibilities.
CART is a term that I have coined to help SMSF trustees manage the mandatory aspects of running a SMSF, including the task of ensuring that everything gets done when it should, such as meeting reporting deadlines.
Understanding your responsibilities, and when you need to meet those responsibilities is the quickest and easiest way to ensure you keep your SMSF up-to-date. Have you checked your super CART lately? Does it need a maintenance check?
Driving your super CART involves the following elements:
- Create a Compliance culture. Life is easy when you get it right from the start. The superannuation rules create excellent opportunities for most Australians without the need to put your retirement savings at risk by breaking the super rules, or missing deadlines or not managing your investments properly.
- Get active on Administration. The key decision you need to make for your SMSF’s administration requirements is whether you do it yourself or you delegate this task to a professional administrator. Note that if you choose to outsource, then you only delegate the task, not the responsibility.
- Be rigorous on Reporting. Are you particular with details? Do you keep your accounts up-to-date? Are you a stickler for punctuality? The answer needs to be ‘yes’ to all of these questions if you choose to run a SMSF, or you need to appoint a service provider who can answer ‘yes’ to all of these questions. You are legally required to keep accounting records, lodge returns and forms, and appoint an auditor to review your accounts.
- Take advantage of super’s Tax treats. Tax-free super for over-60s is a juicy carrot for superannuation savers but super also offers many other tax incentives. As a SMSF trustee/member, you have total control over how you manage your affairs. It can be a financially devastating decision if you choose to ignore the tax rules, and how your super fund complies with those rules.
Take note of SMSF declaration
If you have a self-managed super fund (SMSF) then you already appreciate that, as trustee, you’re responsible for running your super fund, investing your super monies, paying taxes, accepting contributions and eventually administering income streams. If you set up your SMSF on or after 1 July 2007, then you should have signed a SMSF trustee declaration within 21 days of becoming a trustee declaring that you understand your duties and responsibilities as a SMSF trustee. If you set up your SMSF before July 2007, it’s worth checking out the SMSF declaration on the ATO website as a quick refresher of your trustee responsibilities. You may also find helpful, the SuperGuide article SMSF trustee declaration: a quick guide.
Your main CART obligations
Your fund’s administrative tasks generally support many of your SMSF’s compliance, reporting and tax management obligations. Many service providers lump all of these responsibilities into the single category of compliance. Quoting directly from my book, DIY Super For Dummies, 3rd edition (Wiley), after setting up a SMSF, your main CART obligations are
- Acting in accordance with the super and tax
- Acting in line with your fund’s trust deed.
- Complying with the sole purpose test.
- Accepting super contributions.
- Drafting your fund’s investment strategy and reviewing the strategy regularly.
- Considering life insurance needs of fund members when drafting and reviewing investment strategy.
- Investing in accordance with your fund’s investment strategy, and super’s special investment rules.
- Preparing minutes of trustee meetings and decisions.
- Keeping accurate accounting records, including recording all contributions, expenses, tax paid, investment transactions, valuing assets at market value, and other transactions throughout the year.
- Paying income streams and fulfilling the legal requirements, including tax obligations, associated with an income stream (if your fund is paying a super pension).
- Preparing annual financial reports — operating statement and statement of the fund’s financial position.
- Arranging for the audit of your fund’s financial accounts and statements.
- Preparing and lodging, by due date, the fund’s annual return, which contains the annual tax return, regulatory return (SIS compliance information) and member contributions statement.
- Paying the supervisory levy of $259, and tax liability when due.
And there’s more… to running a SMSF
Although essential to the successful operation of your SMSF, your CART obligations (compliance, administration, reporting and tax management responsibilities) are merely the foundation that enables you to fulfil your retirement dreams.
The key objective of any super fund is to deliver fund members a comfortable life in retirement. Achieving this objective involves monitoring and managing a variety of strategies relating to contributions, investments, tax, pensions and estate planning.
Some of the typical strategies that you may consider (and you’ll need to ensure that your SMSF is CART-ready), include: considering the tax consequences of your super contributions both inside and outside of the fund, monitoring and updating your fund’s investment strategy and investments, considering how you intend to structure your income stream in retirement, and whether you intend to make contributions in retirement.
Any strategies that you implement via your SMSF must be in accordance with your fund’s trust deed and the relevant laws in place. As the super and tax rules change over time, it is prudent to periodically review the terms of the trust deed to ensure they permit you to embark on any of the strategies currently permitted under the super laws, and under trust law. For example, taking a transition-to-retirement pension (TRIP) is not covered in some of the older trust deeds still used by some of the older SMSFs (and many of the new trust deeds will need to be reviewed to ensure they reflect the change of status of TRIPs since July 2017).
Every SMSF decision has C-A-R-T implications. A SMSF should have systems in place to manage its CART responsibilities to enable the SMSF trustees to respond quickly to any opportunities or strategies, and to be in a position to implement those strategies.
For more information…
For more information on SMSF compliance and reporting responsibilities, see the following SuperGuide articles:
- Latest superannuation rules: 2018/2019 guide
- Latest superannuation rules: 2018/2019 guide
- Latest super changes: 25-point SMSF guide to ATO’s hot issues
- SMSFs for Beginners: Trish’s 10 commandments of DIY super
- SMSF compliance: Harsher penalties for naughty trustees
- A 10-step action plan for your SMSF