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There are many laws and Acts that self-managed superannuation funds (SMSFs) need to adhere to and abide by. As a type of superannuation fund, SMSFs’ overriding legislation is the Superannuation Industry (Supervision) Act 1993 – also known as the SIS Act.
SMSFs must also pay tax as there are many sections of the Income Tax Assessment Act 1997 (ITAA ’97) that apply only to super funds. In addition, as a trust the general law of trusts will apply and if your SMSF has a corporate trustee structure, then the Corporations Act 2001 also needs to be considered.
These Acts can be very complex and detailed – the ITAA ‘97 has nearly 1000 sections – but trustees do need to be familiar with the law, so they don’t contravene their requirements as SMSF trustees.
The SIS Act defines an SMSF and who can be a member. It explains how an SMSF needs to operate and how it needs to be administered.
But perhaps the most important part of the Act for trustees to familiarise themselves with and keep in mind is the sole purpose test.
The sole purpose test says that each trustee of a regulated superannuation fund must ensure that the fund is maintained solely for one or more of five core purposes. Those core purposes are:
- The provision of benefits for each member of the fund on or after the member’s retirement
- The provision of benefits for each member of the fund on or after the member’s attainment of retirement age
- The provision of benefits for each member of the fund on or after whichever is the earlier of the member’s retirement or the member reaching retirement age
- The provision of benefits in respect of each member of the fund on or after the member’s death, if the death occurred before the member retired and the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependents, or to both
- The provision of benefits with respect to each member of the fund on or after the member’s death, if the death occurred before the member reached retirement age and the benefits are provided to the member’s legal personal representative, to any or all of the member’s dependents, or to both.
The Act also details ancillary purposes for which superannuation funds can be maintained but these are in addition to one or more of the core purposes listed above.
(The section of the Act that defines the sole purpose test can be found here.)
The SIS Act also stipulates the number of penalty units SMSF trustees may incur for breaches. Some fines are imposed by the Australian Taxation Office for breaches of the legislation and are currently $210 per penalty unit. Civil and criminal penalties can also be imposed by the courts for contraventions of the SIS Act. The more severe contraventions involve in-house assets and lending to members and relatives, and can evoke penalties of 60 penalty units or $12,600. (More information on penalties can be found here.)
Governing rules for SMSFs, such as what needs to be included in an investment strategy, along with administration obligations, such as audit requirements and annual tax returns, are also included in the SIS Act.
The annual tax return for an SMSF is the fund’s tax return combined with an annual member contributions statement as required under the Taxation Administration Act 1953.
Income Tax Assessment Act 1997
SMSFs are required to pay tax like other taxpaying entities under the requirements of the Income Tax Assessment Act 1997. As complying superannuation funds, tax rates will be much lower –15 per cent for before-tax contributions and on earnings.
Depending on whether some or all members are in retirement phase, Division 294 of the Act explains how income earned on balances supporting pensions will be treated for tax purposes, i.e. tax-free up to the transfer balance cap.
There will be other sections of this Act that may apply to SMSFs, such as general capital gains tax provisions and deduction provisions. Division 295 defines non-arm’s length income for superannuation funds and its tax treatment and modifies CGT provisions so that CGT is the primary code for calculating gains or losses for SMSFs.
General trust law/Trusts (Hague Convention) Act 1991
The Trusts (Hague Convention) Act 1991 specifies the laws applicable to trusts, including a self-managed superannuation fund trust, and governs their recognition.
In addition, states have separate trustee acts that explain how trustees can be appointed for all trusts, including SMSFs, and their powers.
Corporations Act 2001
If your SMSF has a corporate trustee – i.e. a company acting as trustee for the fund – then penalties will be enforced via the Corporations Act 2001. Effectively this means that penalty units will be incurred by the company instead of each individual trustee – one of the main selling points of this kind of SMSF structure.
The Corporations Act’s financial services provisions, as they relate to the requirement for financial products to provide a product disclosure statements (PDS), are also relevant for SMSFs as they explain when they do, or don’t, have to provide a PDS to members.
There are hundreds, if not thousands, of Acts in Australia at both State and Commonwealth level. Depending on what kind of SMSF you have, what it invests in and the make-up of the members, some of these laws may touch SMSFs in a secondary way.
SuperConcepts executive manager, SMSF Technical & Private Wealth, Graeme Colley, examined legislation that was linked to an SMSF and came up with approximately 20 or more relevant bits of legislation, in addition to what we have mentioned above.
“This included the impact of ‘second tier’ laws like succession law, anti-money laundering, duties laws, anti-discrimination and consumer law to just warm up,” he says.
So, don’t think that because something your SMSF is doing, or has done, doesn’t explicitly contravene superannuation or tax law, that it may not incur a penalty. The sole purpose test should be your initial guiding principal but, if in doubt, it may be better to seek legal advice.