One of the key drivers of the growth of self-managed superannuation funds (SMSF) is the ability for you to take control of your own superannuation.
However, it is important to understand that with this control comes increased responsibility, as trustee of you SMSF as you are ultimately responsible for the prudent management of your super fund. The incentive to maintain your SMSF as a complying super fund is to ensure your super fund continues to receive favourable concessional tax treatment.
What are my key responsibilities as trustee?
As trustee of an SMSF you must act in accordance with:
The provisions of the Superannuation Industry (Supervision) Act 1993 (SISA) and its Regulations.
The SMSF trust deed rules and provisions
Other rules imposed, for example under Taxation Law and Trust Law.
What are the SIS ‘Covenants’?
The Superannuation Industry (Supervision) Act (SISA) contains covenants (i.e. rules) that are automatically deemed to be included in the trust deed of every regulated super fund in Australia. These covenants reflect the duties imposed on all trustees under general trust law, and require trustees to:
Always act honestly
Exercise in the same degree of care, skill and diligence as an ordinary prudent person in managing your SMSF
Act in the best interest of all your SMSF’s beneficiaries
Keep the SMSF’s assets and money separate from other money and assets, such as business and personal money and assets
Retain control over your SMSF
Develop and implement your SMSF’s investment strategy
Not enter into contracts or behave in a way that hinders trustees from properly performing their duties or powers
Allow beneficiaries access to certain information about the SMSF
Delegating your responsibility
While you are allowed to engage the services of professionals (accountants, investment advisors and financial planners) to assist you with running the SMSF, it is important to remember that the ultimate responsibility of the SMSF always rests with you as trustee. Additionally, you cannot receive any remuneration for your duties as trustee.
Sole Purpose Test
A common issue is where a SMSF trustee inter-mingles the money and assets off the SMSF with either their personal assets, or those of a related entity (example: business or unit trust). The trustee must keep the SMSF money and assets separate at all times. These rules are designed to protect the members’ retirement benefits and failure to do so could see the SMSF lose its tax concessions.
The simplest way to ensure you comply with this separation requirement is to have all the SMSF’s bank accounts and investment ownership registrations (where possible) under the name of the individual trustees or corporate trustee with reference to the SMSF’s full name.
Keeping the SMSF money and assets seperate
A common issue is where a SMSF trustee inter-mingles the money and assets of the SMSF with either their personal assets, or those of a related entity (example: business or unit trust). The trustee must keep the SMSF money and assets separate at all times. These rules are designed to protect the members’ retirement benefits and failure to do so could see the SMSF lose its tax concessions.
The simplest way to ensure you comply with this separation requirement is to have all the SMSF’s bank accounts and investments’ ownership registrations (where possible) under the name of the individual trustees or serparate trustee with reference to the SMSF’s full name.
Individual trustees: John Smith and Joan Smith for the J & J Smith Super Fund
Corporate trustee: J & J Super Pty Ltd as trustee for the J & J Smith Super Fund
Some of the benefits of having a ‘special purpose’ corporate trustee for your SMSF are:
The special purpose corporate trustee can only act as a SMSF trustee
Directors can be added or removed via the ASIC registry without the need to update the SMSF investment ownership registrations
Can reduce the personal liability in certain legal circumstances compared to individual trustees
Easier to segregate and identify SMSF assets
Another serious breach can occur when the trustee allows SMSF money or assets be used by the members, their relatives or a related business. This is a continuous compliance focus of the Australian Taxation Office (ATO) (as Regulator of SMSF’s) due to the temptation to provide short-term credit or financial assistance when unforeseen needs arise.
Under SISA, all super funds are required to have an investment strategy, and the strategy needs to be reviewed on a regular basis, and include a consideration for insurance (suggested at least annually). When making investment decisions, you must act in accordance with your SMSF’s trust deed, the investment strategy and the provisions of SISA.
SISA does set out some investment restrictions which include:
Lending to members and their relatives
Acquiring assets from ‘related parties’ of the superannuation super fund
Borrowing by superannuation super funds
Making and maintaining investments on an ‘arm;s length’ basis
Holding investment in, or with related parties
Loans to members
As noted above, you must ensure that no SMSF money or assets are loaned to any member or their relative, regardless of the nature or the term of the loan or provide financial assistance. There have been high profile court cases relating to these provisions and while the argument put forward by many trustees is ‘it’s my money’, you responsibility as trustee overrides this argument.
Acquisitions from related parties
SMSFs are generally prohibited from acquiring assets fro related parties, however thee are a few exceptions to this rule including where the assets is:
A listed security such as a share listed on an approved Stock Exchange
Business real property (e,g, land and buildings used wholly for business purposes)
Widely held unit trust (e.g. public unit trust)
An ‘in-house asset’ and its acquisition would not result in the level of in-house assets of the SMSF exceeding 5% of the SMSF’s total assets
Importantly, when acquiring an assets from a related party the terms and conditions of the acquisitions must me on an ‘arms-length’ commercial basis, and the asset’s purchase price must reflect its rue market value.
SMSFs are generally prohibited from being able to borrow subject to some very limited exceptions. These rules can be found under section 67 of SISA and make reference to structure called ‘Limited Recourse Borrowing Arrangements’ (LRBA), which can be complex. Trustees should seek professional advice before entering into any purchase or investment contracts.
Caution is also needed where your super fund’s bank account allows over drafts or ability to overdraw (even if inadvertently) as this can be considered a breach of the borrowing provisions of the SISA.
Payment of benefits
As a SMSF trustee, you must ensure that benefits are only paid in accordance with the preservation and condition of release rules outlined in SISA. Furthermore, the trustee must also adhere to the SMSF’s trust deed provisions.
This is another good reason to regularly update your super fund’s governing rules. There are instances where out-dated trust deed rules (say prior to 2007) either do not allow members to commence transition to retirement income streams whilst employed; or force compulsory cashing of superannuation once the member attains 65, due to superseded provisions. A simple amendment to the SMSF’s governing rules can overcome these limitations.
Additional obligations introduced from 1 July 2013
Additional measures were introduced as part of the Government’s Stronger Super package in 2012, which place additional responsibilities on SMSF trustees such as thee requirement to:
Regularly review the SMSF’s investment strategy
Consider insurance for members as part of the SMSF’s investment strategy
Value the SMSF’s assets at market value for the purposes of preparing financial accounts and statements
ATP has published on it’s website valuation guidelines.
What are the SMSF reporting obligations?
There are a number of administrative and reporting tasks that must occur throughout the year in relation to running your SMSF.
Annual obligations include:
The annual preparation of financial reports
The completion of the annual independent audit to assess overall compliance with the super law
The lodgement of the SMSF Annual Return, remembering it contains information about the auditor and audit, and cannot be lodged until the signed audit report has been issued.
Record keeping obligations include:
Additionally, as trustee of the SMSF, you must maintain certain records relating to decisions affecting your super fund. These include decisions around admitting new members, changes to the trustee, to buying and selling investment or starting a pension. Different records have different retention periods.
The following records must be held for 5 years:
Annual financial statements
Supporting accounting records for the financial statements
SMSF Annual Returns
The following records must be held for 10 years:
Minutes of meetings
Changes and appointments of trustees
Copies of all reports given to members
Keeping the ATO informed
You must inform the ATO within 28 days if there is a change in:
Directors of the corporate trustee
Contact details (contact person, phone and fax numbers)
Address (postal, registered or address for service of super fund notices)
The easiest way to do this is to let us know and we can update most of this information electronically with the ATO on your behalf.
What happens if you fail in your trustee duties?
As an SMSF trustee, if you fail to act in accordance with the super and tax laws when you risk:
Your SMSF becoming non-complying and losing its tax concessions
Disqualification, removal or suspension as a trustee of the SMSF
Civil or criminal prosecution
Furthermore, if you fail to act in accordance with your SMSF trust Deed, other impacted members of the SMSF may take legal action against you.
SMSF Trustee Penalty Regime
The new penalty regime for SMSF trustees will now proceed according to a recent announcement made by Assistant Treasurer Arthur Sinodinos. The new laws will give the ATO (the Regulator of SMSFs) power to issue a range of penalties to trustees of SMSF that breach the superannuation laws from 1 July 2014.
Currently, the Commissioner of the ATO only has the following options when dealing with a SMSF non-compliance issue:
Accepting an enforceable undertaking in relation to a contravention
Making a SMSF non-complying for taxation purposes (i.e. loss of tax concessions)
Applying to a court for civil penalties to be imposed
Disqualifying a trustee of an SMSF
There is no scope to deal with minor breaches of SISA, as all of the above measures are time consuming, costly and generally inefficient to implement and review.
If the new measures are implemented as announced, the Commissioner will now have greater flexibility in dealing with SMSF non-compliance by issuing:
Rectification directions for contraventions of the superannuation law
Education directions to trustees of the SMSF
An administrative penalty regime for SMSF trustees for certain contraventions of the SISA
A rectification direction will require a trustee to undertake specified action to rectify the contravention within a specified time, and provide the ATO with evidence of compliance with the direction.
An education direction will require a trustee to undertake a specified course of education within a specified time frame, and provide the ATO with evidence of successful completion of the course.
Where an administrative penalty is imposed it must be paid personally by the trustee or the director of the trustee company and cannot be paid or reimbursed by the SMSF.
SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.