SMSFs can be a fantastic vehicle for investing and growing your retirement benefits. But, while there is a lot more freedom allowed within an SMSF, when compared to a retail fund, it’s important to always be mindful of the restrictions and regulations in place for superannuation.
The following is a short list of some of the big potholes we’ve identified over the years while assisting clients with their SMSF administration.
1. Investments not in the fund’s name
A requirement of superannuation legislation is that any assets within a super fund must be owned in the name of the super fund’s trustee. So, if you hold an asset under a different name, this can cause issues as there needs to be a clear separation of personal assets and SMSF assets.
Luckily, this is an easy mistake to avoid and we are always on hand and happy to review contracts and applications to proactively ensure the correct name is being used.
If it’s not possible to hold the asset in the name of the fund trustee, supporting documentation would need to be maintained, confirming that, although the asset isn’t owned directly by the SMSF, it is being held beneficially for the SMSF. An example of this is a bare trust deed, which is necessary when the SMSF borrows funds to purchase an asset, or a Declaration of Trust, accompanied by trustee minutes.
Being well organised will ensure the investments are in the right name.
2. Stick to the investment rules
It is possible for an SMSF to invest in a wide range of investments including term deposits, shares, property and cash.
However, there are strict regulations in place to ensure fund investments are for the sole purpose of providing benefits for the members or their dependants for superannuation purposes and not for personal reasons.
Imagine one of the big retail super funds calling their thousands of members and saying “We’d like to buy another office building, but we want you to pay for it out of your retirement savings”. Although SMSFs are much smaller and the decision making is being made by the same people who are the members of the fund, the SMSF needs to be run by the same rules as the big retail funds, keeping all Fund dealings completely separate from members’ personal dealings.
Most SMSF investment regulations focus on “Related Parties”, which includes members, trustees, any of their relatives and companies or trusts they control. If an SMSF makes a loan, invests in or leases assets to a related party, penalties may apply, and the fund could lose its tax concessions. Any assets or money belonging to the fund must not be used for personal or business purposes unless it’s covered by a specific exemption in the superannuation law. For example, it is possible for the fund to lease commercial property to a related party business, providing it is on a commercial basis and permitted by the fund’s investment strategy.
Complying with the investment rules requires some planning and monitoring of the SMSF on an ongoing basis. When the values of investments change, or related parties are involved, the trustees need to make sure the fund does not run into trouble.
3. Don’t use your SMSF money for personal reasons
SMSFs are super funds, not savings accounts. Yet, a major mistake people often make is to use funds from their SMSF for their personal or business needs.
People take money from their SMSF accounts to help themselves or a close friend or relative. At times it’s a case of confusing the SMSF account for a personal one and in other cases they simply don’t realise it’s not allowed.
It’s essential that everyone separates their personal and business bank accounts from their SMSF accounts. There are very tight preservation laws in place to ensure superannuation is maintained for retirement purposes. Taking money from superannuation before the correct time can result in a breach of these laws and severe penalties to the fund as well as the member. If an amount is withdrawn in breach of the rules, it should be repaid as soon as possible.
Frequent breaches may result in being disqualified from running an SMSF and include financial penalties.
4. Ensure you pay at least the minimum pension
Each year, anyone with a pension within superannuation must take at least a minimum amount in pension payments (this is calculated as a percentage of the pension balance at the beginning of the financial year, which differs depending on the member’s age).
One of the benefits of superannuation is access to tax concessions, so why not maximise that opportunity when it is available?
Income earned on assets that support retirement phase pensions is tax-free. Not maintaining pensions properly and ensuring at least the minimum pension is withdrawn may result in the loss of benefits and the need to pay tax on those earnings within the fund.
Honest mistakes happen and depending on the circumstances you may be able to make a catch up payment to fix this, but prevention is better than cure and arrangements should be made to ensure the minimum amount will be paid automatically before 30 June each year.
5. Hold on to important documents
Keeping the documents of the fund such as the trust deed, minutes of meetings and decisions, investment information, membership and trustee acceptances is essential for compliance, annual audits and any audits by the regulators, as well as when determining the correct course of action for a fund. Loss of any documents may result in an unsatisfactory outcome as disputes may arise between the trustees, members and others making a claim on a fund benefit.
SMSF Statutory Documents (Trust Deeds, Trustee Declarations, Member Applications) should be retained indefinitely, whilst some other records are required to be kept for at least 5 or 10 years.
Records that are required to be kept for five years are:
- accounting records that provide accurate information about the transactions and financial position of the fund
- the annual operating statements and the annual statements of the fund’s financial position
- copies of all SMSF annual returns lodged with the ATO
- copies of any other statements lodged with the ATO or provided to other super funds.
Records that are required to be kept for 10 years are:
- trustee minutes of meetings and decisions on matters affecting the fund
- records of changes to trustees, and a member’s written consent to be appointed as a trustee
- trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee, appointed after 30 June 2007
- copies of all reports given to members
- documented decisions about storage of collectables and personal use assets.
If you need some help navigating this highway, give us a call and we’ll help to direct you around these potholes!
Please note that the information contained in this article is general in nature and should not be taken as financial advice, as all situations and clients are unique, so all matters relating to your finances should be given a unique approach. If you are thinking of entering into an SMSF investment, please seek specialised advice from a financial professional.