Self-Managed Superannuation Fund regulations are quite complex and changing frequently. Although you are most likely getting help from a professional advisor, as a trustee of an SMSF you are in the end solely responsible for complying with all applicable super and tax laws. The vast majority of trustee mistakes result from a lack of up-to-date information and can be avoided with good advice and sound knowledge. The most common mistakes trustees make are:
Trustees must keep on top of reporting requirements. Too often these obligations are left too late, leaving the SMSF exposed to penalties and excess taxes. As a trustee you need the time and knowledge to fulfil your reporting obligations and being up to date. You will probably need the help of your accountant to fulfil those obligations. Also be aware that the SMSF must be audited yearly by a professional SMSF auditor who is obliged to report all breaches to the ATO. Reporting becomes even more important with the introduction of a $ 1.6 million transfer balance cap from 1 July 2018. If the transfer balance has been exceeded inadvertently it has to be rectified immediately.
A key reason for many individuals choosing an SMSF is to have control over their fund’s investments. However, this freedom of choice must be balanced with trustee responsibilities, which require SMSF investments be made in a manner that is prudent and comply with superannuation laws. A common mistake made is the “set and forget” approach. A trustee should regularly review the investments of the fund to make sure that they remain appropriate over time and adjust investments as necessary. The circumstances and needs of SMSF members will change over time and as such all investments should be reviewed regularly to make sure that they still meet changing needs of members. Most trustees acknowledge the benefit of diversification but usually have a home bias only investing in (usually too much) cash and Australian equities (the usual suspects of the big banks, Telstra, Woolies and AMP). It is important to diversify also into mid cap companies and above all overseas. If the trustee does not have the necessary skills to comfortable seek overseas investment opportunities he will have to seek the help of a professional specialising in this area.
The property trap
Strict rules around real estate investment can catch trustees unaware. An SMSF cannot buy a residential property for fund members to live in or use as a holiday home. Business real property is the exception to this rule and generally means the land and building is used wholly and exclusively in a business. To avoid breaches around business real property, it is essential that the transaction is done at market value and is well documented. SMSFs can borrow using limited recourse borrowing arrangements (LRBA) but must comply with very specific legal requirements. Getting professional advice from an SMSF specialist is strongly recommended before entering into an LRBA.
Sole purpose test
This test lies at the core of SMSF compliance. It means that funds need to be maintained for the “sole purpose” of providing retirement and/or death benefits to fund members (or their dependants if a member dies before retirement). You can’t put your holiday cottage into the super fund and the ATO will penalise you if you do so. It is likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements. When investing in collectables, such as art or wine, make sure SMSF members do not have use of, or access to, the assets of the SMSF.
A good example of how fund members can transgress the sole purpose test are member loans. Many small-business people with SMSFs wrongly believe they can tap their superannuation to prop up their business in tough times; the rationale is that it’s their money so what’s the harm in giving themselves a short-term loan? There are no circumstances where an SMSF can lend money to fund members. Funds that do face strong penalties.
An approved SMSF auditor needs to be appointed to audit the fund each year. This includes examining the fund’s financial statements and assessing compliance with the relevant superannuation laws. Many trustees overlook this requirement, where no contributions or payments are made in the financial year. However, an audit is required regardless of the activities and asset values within the fund. The auditor should advise you of any breaches of the rules. As a trustee, you should rectify any contravention as soon as possible. These breaches will also be reported to the ATO. Any breaches of the rules should be rectified, the earlier the better. Waiting until the ATO comes knocking may make it more difficult to resolve the contravention. The ATO focuses on encouraging SMSF trustees to comply with the super laws, but there may be times when a stronger response is warranted. The ATO will take into account the seriousness of the breach and the past compliance of the fund. Having up-to-date records and an understanding of your obligations will help. You will also need a plan in place to ensure future compliance. An SMSF trustee may initiate in writing an undertaking to rectify a contravention. This will include a commitment to stop the behavior and state the action that will be taken to rectify the contravention.
The key to avoiding contraventions is for trustees to refresh their knowledge of relevant super laws.