The choice to set up a self-managed super fund is becoming an increasingly popular one for many Australians who want to take control of their investments.
The major attraction of an SMSF is that you become, as a trustee, your own fund manager, which means you are ultimately responsible for the both the investment decision making and the administration of the fund. There are significant penalties imposed on those who fail to perform their duties properly.
There are many benefits to having an SMSF, such as the opportunity to actively decide upon the fund’s investment strategy and to select appropriate asset classes. An SMSF structure therefore means that trustees have a number of responsibilities and duties, so the role of a trustee should not be taken lightly.
Trustees should familiarise themselves with the legislative requirements and administrative responsibilities of running a fund. These rules exist to ensure a super fund’s assets are protected until they are needed at retirement.
Here’s a list of some of the responsibilities you take on when you start a DIY super fund:
Save for retirement
SMSFs must meet the sole purpose test under superannuation law. The sole purpose test means that a SMSF must be maintained for the sole purpose of providing benefits to members upon their retirement, or to their dependants if a member dies before retirement.
Prepare and implement and investment strategy
Trustees of SMSFs are required to prepare and implement an investment strategy for their fund, and regularly review the strategy. The investment strategy must reflect the purpose and circumstances of the fund and consider the risk, return and liquidity of each investment made.
Record keeping requirements
Trustees must keep some records for a minimum of five years and other records for a minimum of 10 years. This is to ensure that they can verify their decision-making processes and an accurate history of the fund can be established.
Super assets must be kept separately
Trustees of SMSFs must keep money and other assets of the super fund separate from their personal assets and the assets held by employers who contribute to the fund.
Money must not be lent to members or relatives
Trustees must not lend money, or provide direct or indirect financial assistance from the fund, to a member or a member’s relative.
Don’t borrow money
SMSFs are prohibited from borrowing money, except in some limited circumstances, such as to gear investments. This is to ensure that there is money available to pay out all member benefits when members retire.
Buying assets from a related party
Trustees are prohibited from acquiring assets for their fund from a related party of the fund.
Limited exceptions to this rule include where:
- The asset is a listed security
- The asset is business real property
- The asset is money contributed to the fund
- The asset is an in-house asset and the acquisition would not result in the in-house assets of the fund exceeding 5% of the fund’s total assets.
Assets must be bought and sold at market value
The purchase and sale price of SMSF assets should always reflect a true market value for the asset. Income from assets held by the Fund should always reflect a true market rate of return.
Early access to benefits
Trustees must not take money out of their SMSF earlier than legally permitted as it is meant for retirement.
Early access or release of preserved benefits is permitted only in cases of severe financial hardship or on tightly restricted compassionate grounds. These situations occur only in very limited circumstances.
Reporting and administration obligations
All SMSFs need to lodge an annual return with the ATO each year to:
- Report income tax
- Report super regulatory information
- Report member contributions
- Pay the supervisory levy.
Consequences of breaches by trustees can include:
- The ATO issuing fines and penalties and freezing the assets of the fund
- Trustees being disqualified and suspended
- The fund losing its compliance status
- The ATO seeking civil and/or criminal penalties through the courts.
An SMSF trustee should receive professional advice from a financial adviser and proper assistance from the fund’s administrator so that they are aware of their roles and responsibilities as trustees and avoid any regulatory penalties.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
