While running your own SMSF has a number of attractive benefits, it also comes with a lot of important rules and regulations.
It is essential to be aware that when you establish an SMSF, you become a Trustee of the SMSF and are responsible
for complying with all legal obligations. Compliance breaches made while managing SMSFs range from minor administrative
errors through to significant breaches, with the potential for big penalties. Understanding and avoiding the following
common compliance mistakes will help to ensure you are not at risk of penalties.
Separation of Assets
All assets of the SMSF must be kept separately from Trustees’ personal assets.
Ownership
Trustees need to ensure that the SMSF has a clear ownership of its investment assets. This means all SMSF assets (e.g.
investment account holders, insurance policy owners) must be held in the name of either:
- The Individual Trustees 'as Trustees for' the SMSF; or
- The Corporate Trustee 'as Trustee for' the SMSF.
The assets can't be held in the name of a Trustee or a Member as an individual.
For more information, please visit the ATO website here.
Income
All income derived from your SMSF’s assets should be deposited into the SMSF's bank account as soon as they are paid.
For example, the rental income from the SMSF’s property investment, cash dividends and distributions should be banked
into the Transaction Bank Account established under your SMSF’s name as soon as it is paid to your SMSF. Trustees
are highly recommended to establish an automatic direct credit with the paying entity to ensure that any cash income
is received by the SMSF without delay.
Expenses
Expenses can only be paid for by the SMSF where they relate to running the SMSF and the tax invoice for the expense is
in the name of the SMSF. In addition, the expense cannot have an element of personal use.
The SMSF related expenses should be paid from your SMSF's Transaction Bank Account directly. Where it is not possible to
pay from your SMSF, you can pay an expense on behalf of the SMSF. In this case, you must ensure that the tax invoice
for the expense is in the name of the SMSF and you can reimburse yourself from the SMSF for the expense immediately
(preferably limited to only several days).
For more information, please visit our website here.
Insurance
Insurance Policies must comply with the following rules:
- The Insurance Policy Owner must be in the name of the SMSF with a specified Member named as the Insured person.
- The insurance premiums should be paid from the SMSF's Transaction Bank Account.
- Allowed Insurance Polices: Life insurance; Any-occupation TPD; Standard Income Protection.
- Disallowed Insurance Polices: Trauma; Own-occupation TPD was disallowed from 1 July 2014 (existing policies purchased
prior to 1 July 2014 can remain in place).
For more information, please visit our website here.
Contribution Rules
Accepting Contributions
There are rules for the types of contributions an SMSF can accept for Members. Before accepting a contribution, Trustees
must make sure that the SMSF is allowed to accept that type of contribution for the Member.
The types of contributions your SMSF can accept are restricted by a number of factors:
- The age and employment status of the Member;
- The amount of contributions, known as the Contribution Caps;
- The Member’s Total Superannuation Balance on 30 June of the previous financial year (affecting the Member’s eligibility
to Non-Concessional Contributions, Spouse Contributions and Government Co-contributions).
For more information, please visit our website here.
Returning Contributions
It is important to note that contributions generally cannot be returned to a Member because they regret making them or
they or their agents made an error in their decision to contribute. Contributions may only be refunded in circumstances
tightly prescribed by the legislation.
Contributions an SMSF must return are detailed on the ATO website here.
Release Authorities
When your SMSF receives a valid Release Authority issued by the ATO, it is authorised to release an amount from the Member’s super account according to the instructions in the Release Authority. For instance:
- Excess concessional contributions release authority;
- Excess non-concessional contributions release authority;
- Release authority for Division 293 tax.
A contravention will occur if you release this money before your member lodges an election form and your SMSF receives a release authority.
For more information, please visit the ATO website here.
Conditions of Release
Members must meet a condition of release or meet the early access eligibilities before the Member can access his / her
super benefits. Unless, the Member has unrestricted non-preserved super benefits which can be withdrawn at any time
and at any age.
For more information, please visit our website here.
Valuation of Assets
A valuation of assets is required under various events to confirm your SMSF has complied with the relevant superannuation
law. It is also a key component in preparing meaningful SMSF financial reports.
For more information, please visit our website here.
Residency Test
To be a complying Superfund and receive tax concessions at 15%, the SMSF needs to be an Australian Superfund at all times
during the year. The following three tests must be met for an SMSF to maintain its residency status:
- The SMSF was established in Australia, or at least one of its assets is located in Australia.
- The central management and control of the SMSF is ordinarily in Australia.
- The SMSF either has no active Members or it has active Members who are Australian residents and who hold at least
50% of the total market value of the SMSF's assets attributable to super interests, or the sum of the amounts
that would be payable to active Members if they decided to leave the SMSF.
If your SMSF fails the residency test, you should roll over your super benefits to a resident regulated Superfund (e.g.
Retail Fund) and wind up the SMSF. Otherwise the SMSF will become non-complying.
For more information, please visit the ATO website here.
Disqualified Trustees
A disqualified person is not permitted to be an SMSF Trustee.
A person is disqualified if they:
- have been convicted of an offence involving dishonesty;
- have been subject to a civil penalty order under the super laws;
- are insolvent under administration (including being an undischarged bankrupt);
- have been disqualified by a court or regulator (for example, by ATO or APRA).
A company can't be a Trustee if:
- a director or other responsible officer of the company (such as a secretary or executive officer) is a disqualified
person;
- a receiver, official manager or provisional liquidator has been appointed to the company;
- action has started to wind up the company.
If you become a disqualified person, you must immediately cease being a Trustee. If you resign as a Trustee, your SMSF
effectively has six months to restructure itself. Generally, this will mean rolling your super interests out of the SMSF. To apply for a change of Trustee with ESUPERFUND, please follow the steps detailed here.
For more information, please visit the ATO website here.
Borrowings
An SMSF can borrow money only in very limited circumstances:
- Borrowing money for a maximum of 90 days to meet benefit payments due to Members or to meet an outstanding surcharge
liability (the borrowings can't exceed 10% of the SMSF’s total assets);
- Borrowing money for a maximum of seven days to cover the settlement of security transactions if the borrowing does
not exceed 10% of your SMSF’s total assets (a Trustee can only borrow to settle security transactions if, at
the time the transaction was entered, it was likely that the borrowing would not be needed);
- Borrowing using instalment warrants or limited recourse borrowing arrangements that meet certain conditions.
A Trustee can use a limited recourse borrowing arrangement to fund the purchase of a single asset (or collection of identical assets that have the same market value) to be
held in a separate Trust. Any investment returns earned from the asset go to the SMSF Trustee. If the loan defaults,
the lender's rights are limited to the asset held in the separate Trust. This means there is no recourse to the other
assets held in the SMSF.
For more information, please visit the ATO website here.
Related Party Transactions
Definition of Related Parties
A related party is defined as:
- Any Member/Trustee of the SMSF or any relatives of the Member/Trustee of the SMSF;
- A standard employer sponsor of the SMSF;
- Part 8 associate of an SMSF Member or a standard employer-sponsor of the SMSF.
For more information, please visit the ATO website here.
Acquiring Assets from Related Parties
Your SMSF cannot acquire an asset from a related party (known as In Specie Transfers) unless it is acquired at market
value and is:
- ASX Listed Securities
- Widely Held Managed Funds
- Business or Commercial Property
- Cash Based investments such as Bonds and Debentures.
For more information, please visit our website here.
Other Related Party Transactions
Besides the acquisition of assets, Trustees also need to ensure that all other transactions do not breach the related
party restrictions imposed by the super law. For example:
- The SMSF’s residential property cannot be leased to a related party of the SMSF.
- The collectables and personal use assets cannot be leased to or used by a related party.
Provide Audit Evidence within 14 Days
During the annual compliance process, the Auditor may request further information from Trustees. Trustees must ensure
that the requested relevant documents are given to the Auditor within 14 days of the request being made. If Trustees
fail to provide the documents within 14 days, the Auditor reserves the right to report this breach to the ATO.
Dealing with Non-Compliance
The Auditor may qualify your SMSF’s Audit Report if during the course of the annual audit, they have formed an opinion
that:
- A contravention of the super laws may have occurred, may be occurring, or may occur in relation to the SMSF;
- The financial position of the SMSF may be, or may be about to become, unsatisfactory.
If a reportable contravention occurs, the ATO will be notified. The following courses of action are the ATO’s approaches
to deal with SMSF Trustees who have not complied with super laws:
- Education direction;
- Enforceable undertaking;
- Rectification direction;
- Administrative penalties;
- Disqualification of a Trustee;
- Civil and criminal penalties;
- Allowing the SMSF to wind up;
- Notice of non-compliance;
- Freezing an SMSF’s assets.
For more information, please visit the ATO website here.