Self-managed super funds: Top tips from the ATO
Being the trustee of a self-managed super fund (SMSF) gives you the opportunity to manage your own superannuation investments and make your own investment choices.
As the trustee and member of a SMSF, you can have full control over how your retirement savings are invested, whether you want returns from property, shares or even art and collectables.
If you’re thinking of setting up a SMSF, your duties as a trustee will include devising an investment strategy, accepting contributions and paying benefits.
The Australian Taxation Office (ATO) is the authority of SMSFs, enforcing the majority of regulations and restrictions that apply to the investment strategy. This morning Peter Iordanidis of the ATO provided an overview of SMSFs for trustees.
Some top tips to ensure your fund is compliant:
- Understand the sole purpose of your fund
As a trustee, you must ensure that the sole purpose of your SMSF is to provide for its members in retirement. Even if you use a professional to do certain tasks on your behalf, you still must comply with super and tax laws to protect your members’ assets. To ensure that you get the full tax concessions available to SMSFs, you must pass the sole purpose test.
Your investment decisions should be based on increasing returns to your fund. You need to consider diversification, risks and likely returns from your assets. You also need to consider your members’ needs and circumstances – even if you are the only member. For example, if you’re nearing retirement age, you may want to change your SMSF asset mix to include more low risk, low reward investments. - Make sure you don’t get any benefit pre-retirement…
With post-retirement benefits the sole purpose of your SMSF, you must ensure that you don’t use the fund to get any current day benefits, or you face penalties including the loss of your tax concessions, fines up to $220,000 or up to five years’ jail time. Trustees are prohibited from dipping into their funds to pay for bills, school fees or for any non-retirement investments.
As a trustee you are prohibited from borrowing money from the SMSF pre-retirement (with some exceptions) and all transactions made with your SMSF must be made “at arm’s length”. Trustees must make and maintain investments on a strict commercial basis, while the purchase and sale prices of fund assets should always reflect true market value.
You can use your SMSF to invest in a wide variety of assets, even art and collectables. You can use your fund for artwork and collectables, but you cannot enjoy a direct or indirect benefit from the investment by displaying it in your home or business prior to retirement. - …And your family doesn’t either
A fund is prohibited from lending money to a member of the fund or a relative of a member. The definition of relative is quite broad – this can include siblings, parents, children, and extended family members. The definition also covers the spouse of any family members. That means that you can’t lend money from your SMSF to your sister-in-law.
Your SMSF is also prohibited from providing financial assistance to a member or a member of a relative, whether directly or indirectly. This means can’t use your SMSF as security for your child’s mortgage.
Iordanidis provided the example of a husband and wife who were trustees of their SMSF. Their SMSF sold a property it owned, but no money was paid for the property, as the sale contract created a loan between the fund and the purchasers.
However, it turned out that the purchasers were relatives of the husband and wife, which meant that they had made a loan to family members. The trust incorrectly advised the ATO that the loan was repaid in full, and the fund was deemed non-complying and stripped of its tax concessions.
Trustees are generally prohibited from acquiring non-cash assets from related parties – a rental property, for example. - Do your paperwork (or get someone else to do it for you)
As a trustee for a SMSF, you have a range of annual responsibilities. You must keep your records up to date and value assets at their current market value at least once a year. You have to prepare financial statements, lodge an annual return and report contributions, even if no contributions were made that year. You’ll also need to lodge an income return every year from the year you set up your fund, for each member. Most of those duties can be performed by an accountant, but it’s your responsibility to make sure they are done and lodged with the ATO.
The ATO also requires an audit of your SMSF each year, performed by an approved SMSF auditor who is registered with ASIC and has a SMSF Auditor Number. The auditor can’t be a trustee member of the fund, or your accountant who prepares your other financial statements. You’ll also need to make sure you appoint the auditor early enough for them to do the audit and for you to submit it. An audit is required even if you haven’t made any contributions in the year.
When you engage professionals, make sure you have a clear understanding of their responsibilities.
Any contraventions of super or tax law that are identified by your auditor must be fixed. You can ask the ATO for advice on how to go about rectifying any mistakes you’ve made.
There are a range of other rules and regulations surrounding SMSFs that you need to know to receive full tax concessions (and avoid penalties). Go to the ATO's website to learn more.
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