by Olivia Long

There are a number of reasons why you may want to establish a self-managed super fund (SMSF) with most trustees citing flexibility and control. SMSFs are a very attractive investment vehicle, however there is a level of responsibility you need to consider.

As a member of an SMSF, you must also wear a ‘trustee’ hat. As a trustee, the Government will hold you personally responsible for ensuring you abide by the rules on running an SMSF.

These include acting in accordance with:

  • the clauses of your fund trust deed;
  • the provisions of the SIS Act and the SIS regulations;
  • the Corporations Act 2001, and;
  • other general rules, such as those imposed under tax and trust law.


SIS Act Requirements

The rules of the SIS Act bind trustees to:

  • act honestly in all matters concerning the fund
  • exercise the same degree of care, skill and diligence as an ordinary prudent person in managing the fund
  • act in the best interest of all fund beneficiaries
  • keep the money and assets of the fund separate from other money and assets (for example your personal assets)
  • retain control over the fund
  • develop and implement an investment strategy
  • not enter into contracts or behave in a way that hinders trustees from performing or exercising their functions or powers, and
  • allow members access to certain information.

Any funds that do not comply with the rules above will be deemed by the regulator (ATO) as “non complying” and as a result will lose the tax concessions for the financial year of the breach.

This essentially means any income or capital gain generated by the fund will be taxed at 45 per cent rather than 15 per cent.

Sole Purpose Test

One of the most important rules with SMSF is the sole purpose test. Essentially, as a trustee of the fund you must ensure everything that happens within the fund is for the sole purpose of providing retirement benefits to its members. 

In-house Assets

The sole purpose test is closely tied to the concept of in-house assets. In house Assets cannot exceed 5 per cent of the funds value.

An in-house asset can be defined as “a loan to or an investment in a related party of the fund or an investment in a related trust of the fund or an asset of the fund which is subject to a lease or a lease arrangement between the trustee of the fund and a related party of the fund other than an asset which is excepted under the act”.

Assets specifically exempted are;

  • Business Real Property - The main and most utilised exemption is the “business real property” exemption which allows a property which is utilised by a business which is owned by the fund to be leased to a related party of the fund. This must be a legally enforceable arrangement and must be on an arms length basis. 

Other exemptions are

  • Investment in a widely held unit trust;
  • Property owned by an SMSF and a related party as tenants in common excluding a property that is subject to a lease or leasing arrangement between the trustees and a related party of the SMSF.


Accept contributions in accordance with the rules

There are a number of rules around what constitutes a contribution and how much can be contributed to a fund/member each financial year. As an SMSF trustee, you need to ensure you operate within these rules when putting money into super.

Paying benefits to members

Superannuation is money invested for a member’s retirement and it’s vital as a trustee that you understand how and when you can start withdrawing money from your SMSF.

Manage the fund’s investments

An important aspect of compliance in the SMSF surrounds your role as trustee and managing the fund’s investments. This includes:

  • Formulating an investment strategy and ensuring the investments are in line with the strategy;
  • Knowing what you can and can’t invest in within the SMSF;
  • Securing the assets of the fund;
  • Understanding the rules around acquisition of assets from a related party;
  • Ensuring you do not lend money from the fund to a member or member’s relative.

Meet lodgement and administrative obligations

Finally, all SMSFs must lodge an annual income tax return and statutory documentation. As a trustee of an SMSF you must ensure the fund’s administrative obligations are met, your annual accounts have been prepared and ensure your fund undergoes an annual independent audit with an approved SMSF Auditor.

Summary

Whilst it may seem there are a number of rules to note, many trustees find if they stick to the basics running an SMSF is actually quite straightforward.

An alternative is to work with a full service SMSF Administrator who can hand hold you with the administration and compliance – freeing you up to focus on your investments!