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SMSF investment rules: What every trustee should know

SMSFs can potentially provide members with far more control and flexibility than big super funds, but that doesn’t mean it’s open slather. Breaking the rules can be costly. 

On 1 January 2023, the penalty unit amount for SMSF breaches rose 23% to $275, up from $222. That means self-managed superannuation fund (SMSF) trustees incurring the lowest administrative penalty of 5 penalty points will now be up for $1375. Those incurring the maximum 60 penalty points will now have to pay $16,500.

It is obvious with this increase in penalty points the Australian Taxation Office (ATO) means business when it comes to policing SMSFs, so it is now more important than ever that SMSF members have a clear understanding of the rules and their responsibilities when it comes to overseeing their SMSF.

Need to know

All trustees need to sign a trustee declaration – a legal document that signifies they have understood all their legal requirements as a trustee. They also need a trust deed that sets out how the fund will be run and operated, and an investment strategy that explains how the fund’s trustees believe the investments chosen are in the best interests of members.

Sole purpose test

SMSFs need to comply with the sole purpose test, which requires your super fund be run for the sole purpose of providing retirement benefits for members.

The sole purpose test applies to all super funds, not just SMSFs. You can read more about how it relates to SMSFs in â€˜Self-managed superannuation funds ruling SMSFR 2008/2: sole purpose test’.

The sole purpose test in section 62 prohibits trustees from maintaining an SMSF for purposes other than for the provision of benefits specified in subsection 62(1). The core purposes specified in that subsection essentially relate to providing retirement or death benefits for, or in relation to, SMSF members.

The SMSF can also maintain the fund for one or more of these purposes and other specified ancillary purposes, which relate to the provision of benefits on the cessation of a member’s employment and other death benefits and approved benefits not specified under the core purpose.

Essentially if you, or anyone related to the fund, receives a financial benefit not related to your retirement then your fund might not meet the sole purpose test.

Assets in name of fund

It is a legal requirement of SMSFs that you invest in assets in the name of the fund – not in your own name. Your SMSF is required to have its own bank account and fund assets must be held in the name of the individual trustees as trustees for the fund (or a corporate trustee).

As the assets belong to the fund, they are somewhat protected in the event of a personal legal dispute against one of the member’s assets.

The penalty for failing to keep the assets of the fund separate from members’ personal assets is 20 penalty units where each penalty unit is $275 (as at 1 January 2023) and applies to each trustee, which would be $5,500 for each member of the fund.

Investing in the name of the fund is relatively straightforward for most kinds of assets. However, if your fund invests in property and the property is not owned outright by the fund, you must be careful about what legal entity is the holder of the asset. This is particularly the case if your fund acquires the asset via a limited recourse borrowing arrangement (LRBA).

In these cases, a holding trust will need to be set up to acquire the asset, and it is the holding trust that needs to be on the contract. However, this will depend on state in which the asset is located so it’s important to get legal advice on the issue.

Learn more about LRBA structures.

Restrictions (on investments)

An SMSF isn’t a free-for-all when it comes to investments. There are restrictions around what you can and can’t invest in that have evolved over time as the regulator cracks down on (real or perceived) loopholes.

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