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- Regulatory framework
- Residency requirements
- Passing the sole purpose test
- Developing an investment strategy and rules
- Considering member insurance needs
- Accepting contributions and making payments
- Monitoring total super balance and transfer balance caps
- Appointing a registered auditor
- Lodging an annual return and paying tax
- Common mistakes made by SMSF trustees
- Current areas of SMSF compliance focus
- The bottom line
Self-managed super funds (SMSFs) offer their members more control and flexibility than they could otherwise achieve with a public fund, but freedom has its limits.
SMSFs are privately run superannuation trust structures. All members of an SMSF must be either an individual trustee of their fund, or a director of the corporate trustee of the fund (if the SMSF has been set up with a corporate trustee structure). And all SMSF trustees are responsible for ensuring their fund complies with Australian superannuation legislation.
SMSFs are regulated by the Australian Taxation Office (ATO), which can impose harsh penalties on SMSF trustees for non-compliance with the rules.
Complying super funds in Australia (including both SMSFs and public funds) are eligible for tax concessions under Australian super legislation. Member contributions and fund earnings for compliant super funds are taxed at the concessional super rate of 15% (up to certain contribution limits).
To ensure compliance, there are a various SMSF trustee responsibilities. These responsibilities are outlined in an SMSF trustee declaration that each trustee of an SMSF must sign and return to the ATO within 21 days of their appointment to indicate that they understand all their legal compliance obligations.
In this article we will look at the major trustee responsibilities. Corporate trustees should be aware that they must also comply with the general provisions of the Corporations Act.
An Australian SMSF must satisfy the following three residency conditions to be compliant.
- The fund must have either been established in Australia (i.e. the initial contribution to set it up was made and accepted in Australia), or have at least one Australian-based asset.
- The central management and control of the fund is ordinarily in Australia. However, trustees are permitted to manage their fund temporarily outside Australia for up to two years without breaching this residency requirement.
- The fund has either no active members or it has active members who are Australian residents and hold at least 50% of its assets (or 50% of the amounts payable to active members if they decide to leave the fund).
Passing the sole purpose test
Any super fund (including an SMSF) needs to pass the sole purpose test to be compliant and eligible for tax concessions. This means that the fund must operate for the sole purpose of providing retirement benefits to its members (or to their dependants if the member dies).
An SMSF will fail the sole purpose test if:
- Any trustee (or related party) directly or indirectly benefits outside of the fund from any SMSF investment decisions made. SMSF trustees must also ensure that all the fund’s investment transactions are done at ‘arm’s length’ at current market values. This includes any transactions involving relatives or business associates of fund members.
- Any trustee has the use of (or access to) SMSF assets or benefits prior to reaching preservation age and meeting a superannuation condition of release. A major requirement of the sole purpose test is to keep members’ SMSF assets separate from their personal assets. The fund must be the owner of all SMSF assets; they can’t be held in the name of members or trustees.
Developing an investment strategy and rules
It’s a legal requirement for SMSF trustees to prepare a documented investment strategy during the fund’s set-up process. This strategy must be reviewed regularly by fund trustees to ensure that it continues to reflect members’ changing needs and circumstances.
Rules that allow the trustees to implement the fund’s investment strategy should be included in the fund’s trust deed. These rules should outline the specific types of investments the trustees can make.
Considering member insurance needs
SMSF trustees must consider whether to take out appropriate insurance cover for each member of their fund as part of preparing their investment strategy. Important considerations for each member include:
- Their current level of debt
- Whether they have any dependants and, if so, how those dependants could be provided for if the member died or became unable to work for any reason
- Their current insurance cover held outside super or in another super fund.
SMSFs can provide life, total and permanent disability (TPD) and income protection insurance for their members. However, they cannot provide trauma or health insurance.
Accepting contributions and making payments
Trustees of SMSFs are responsible for ensuring they only accept contributions from members (or from employers on behalf of members). They must also ensure that member benefits are not paid as lump sums or income streams unless a member:
- Has reached their preservation age and met a condition of release, or
- Has special circumstances and is entitled to access their super early (for example, if they are permanently or temporarily incapacitated, if they’re suffering from severe financial hardship, if they have a terminal medical condition, or on specific compassionate grounds).
Monitoring total super balance and transfer balance caps
If any SMSF members have a combined total super balance of more than $1.6 million in their accumulation and retirement accounts, it affects their eligibility to make non-concessional (after-tax contributions), to use the bring-forward rule, and to make co-contributions.
The transfer balance cap places a limit on the amount that can be transferred into a super fund member’s retirement account. To confuse matters, this cap is also currently $1.6 million. If a member exceeds this cap, they are liable for excess transfer balance tax. This cap will increase over time by $100,000 multiples, in line with consumer price index (CPI) movements.
SMSF trustees also have a number of administrative, reporting and record-keeping obligations to ensure their fund’s compliance with super legislation. These responsibilities include:
- Appointing an SMSF auditor
- Valuing fund assets at market value
- Paying the ATO levy
- Event-based reporting
- Reporting member or trustee changes
- Maintaining records.
Appointing a registered auditor
The trustees of an SMSF must appoint an approved auditor at least 45 days before their fund’s annual return to the ATO is due. This auditor must be independent (i.e. not have any financial interest in the SMSF, nor have any personal or business relationships with fund members or trustees).
Approved auditors are registered with the Australian Securities and Investments Commission (ASIC). An SMSF auditor is responsible for analysing a fund’s financial statements and assessing its compliance with superannuation law. They must report any non-compliance issues to all fund trustees and the ATO.
Lodging an annual return and paying tax
SMSF trustees are responsible for submitting their fund’s audited annual return to the ATO and for ensuring any associated tax obligations are paid in full.
In addition to providing income tax information, the SMSF annual return is also used to report both member contributions and superannuation regulatory information.
Event-based reporting is an ATO framework that commenced on 1 July 2018 to enable the transfer balance cap to be administered.
SMSF trustees need to start reporting under the event-based reporting framework as soon as one of their members begins a retirement phase income stream.
The timeframes for this event-based reporting depend on the SMSF member’s total superannuation balance. SMSFs that have any members with a balance of $1 million or more in the year before a retirement phase income stream commences for one of its members must report on any events that affect transfer balances within 28 days of the end of the quarter in which the event occurs.
However, where all the fund members of an SMSF each have total superannuation balances less than $1 million, this event-based reporting can be done annually at the same time as the fund’s annual return is lodged. The ATO estimates that up to 85% of all SMSFs in Australia will only be required to report events annually.
The trustees of an SMSF must ensure that employer superannuation guarantee contributions made to their fund on behalf of fund members are paid via the ATO’s electronic SuperStream system.
Paying the ATO supervisory levy
All SMSFs must pay an annual supervisory levy to the ATO. The annual levy is currently $259. It must be paid in advance, meaning that SMSFs pay double this annual levy in the first year of their operation.
Common mistakes made by SMSF trustees
The table below provides the most common compliance mistakes made by SMSF trustees. These mistakes are known as ‘contraventions’ and are reported to the ATO as part of the independent annual auditing process.
Type of contravention
Proportion of total contraventions
Providing loans or financial assistance to SMSF members
In-house assets (these include loans provided to a related party of an SMSF member)
Separation of assets (i.e. SMSF assets are in the name of individual fund members rather than the fund itself)
Borrowings (this includes a fund not complying with specific SMSF borrowing rules)
Investments at arm’s length
Acquisition of assets from related parties
Source: ATO (2016-17)
Providing loans or financial assistance to SMSF members or their relatives are the most common contraventions, followed by the separation of assets.
In the 2017-18 financial year, 124 SMSFs had trustees disqualified for either loaning money or paying benefits early to members (i.e. prior to them reaching their preservation age and meeting a condition of release). In addition, the ATO imposed $1,743,003 in penalties to SMSF trustees for all reported contraventions.
In addition, the ATO recently released the top 5 errors with SMSF annual returns. These were:
- Bank account not unique to the SMSF
- Providing an incorrect electronic service address (ESA)
- Not valuing SMSF assets at market value
- Trying to lodge with zero assets
- Lodging a SMSF annual return without auditor details.
Current areas of SMSF compliance focus
Besides focusing on the most commonly reported contraventions outlined above, another current area of SMSF compliance focus for the ATO is tax avoidance schemes that encourage people to channel funds inappropriately through their SMSF. The ATO has launched the Super Scheme Smart program to educate trustees about how to identify and avoid these schemes.
The ATO is also closely monitoring:
- The recently introduced total super balance and transfer balance caps to ensure SMSF compliance
- The non-lodgement of SMSF returns (especially for newly established funds)
- The top 100 SMSF funds (i.e. those with the largest total balances) to identify any aggressive tax-planning arrangements that may contravene super legislation.
SMSF trustees are legally obliged to ensure their fund’s compliance with superannuation legislation in Australia. The ATO imposes a range of penalties for non-compliance, depending on the seriousness of the breach.
The information contained in this article is general in nature.