SMSF

Your funds may be inaccessible for a long time

Generally, you can only withdraw your superannuation if you satisfy a condition of release. The conditions of release are:

• Reaching your preservation age and retiring
• Reaching your preservation age and starting a transition-to-retirement pension (TRIP)
• Ceasing employment between the ages of 60 and 64 years
• Reaching the age of 65
• Ceasing employment and having certain pre-1999 super benefits
• Severe financial hardship
• Compassionate grounds
• A terminal medical condition
• A temporary resident permanently leaving Australia Permanent disability or permanent incapacity
• Temporary incapacity
• Death
• A decision to take your super benefit as a lifetime pension or annuity
• Having a preserved amount of less than $200

The most common superannuation condition of release is retirement, provided you have reached your preservation age. This age depends on your date of birth, as outlined in the table below:

Date of birth	Your preservation age
Before 1 July 1960	55
From 1 July 1960 until 30 June 1961	56
From 1 July 1961 until 30 June 1962	57
From 1 July 1962 until 30 June 1963	58
From 1 July 1963 until 30 June 1964	59
On or after 1 July 1964	60

Regulatory changes

Since the introduction of compulsory superannuation in Australia in 1992, there have been many changes to the rules. The super system (like the tax system) reflects government policy changes over the years.

Given that there will be an increasing demand for funding for age pensions in the future due to our ageing population, it’s not likely the government will significantly alter the basics of the superannuation system. However, it seems that governments can’t resist the urge to tinker with it.

Knowledge and time to administer

Several rules must be complied with when running an SMSF. Since the sole purpose of superannuation is to provide for retirement, there is a strict prohibition on accessing super funds unless a condition of release is met (see above).

As a result, precise financial records must be kept, and there are restrictions on how self-managed super funds can be invested. It will take you time to learn the rules and ensure compliance.

Cost

There are costs involved with setting an SMSF up, running it, and winding it up. Set-up costs include professional advice and fees (e.g. legal expenses). Ongoing costs include investment, accounting and SMSF audit fees to comply with SMSF legislation. SMSF insurance is another optional but common annual cost incurred. Wind up costs include further professional advice and fees, paying out or rolling over any SMSF member benefits as well as any outstanding tax obligations of the fund.

This begs the question – what is the minimum amount you need to make setting up an SMSF worthwhile? It may not be in your best interests to start an SMSF if your superannuation balance is currently less than $200,000. This is because the setup and ongoing costs of the fund generally won’t make it the most cost-effective way to build your retirement nest egg until you reach that $200,000 threshold.

However, if you do have less than $200,000 in your super, there can be circumstances where setting up and running an SMSF can still be viable. This includes situations where:

• You are willing to undertake much of the administration and management yourself as an SMSF trustee.
• Where you will soon (i.e. within the next few months) receive a large asset (such as an inheritance or business property) that can be transferred into a newly created SMSF.

The larger your SMSF balance, the more cost effective it is likely to be for you.

If you have decided to take the front seat in driving your superannuation, then this article will help you with how to set up an SMSF (Self Managed Super Fund).

There are generally five categories of superannuation funds:

• Retail super funds
• Industry super funds
• Public sector super funds
• Corporate super funds
• Self managed super funds

While the first four categories are run by superannuation fund providers, SMSFs have become increasingly popular in the last 20 years because they are self-managed. This means that the members themselves are in charge of managing their funds and are thus responsible for the setup, management, compliance, and overall decision making.

Consider superannuation legislation

To set up your own SMSF, you need to ensure that it is compliant with superannuation legislation. An SMSF needs to be set up correctly for three key reasons:

1. To be eligible for the tax concessions that the superannuation environment offers. The income of a complying self-managed super fund is taxed at just 15%. That income includes:

• Member superannuation contributions
• Capital gains made on investment assets in the fund (such as an investment property)
• Interest on investments
• Dividends on shares
• Rent on investment property

2. So that your SMSF can receive member contributions.
3. So that the SMSF administration is as easy as possible.

According to the latest Australian Taxation Office (ATO) statistics, more than one million Australians are members of self-managed super funds. That number is steadily growing each year.

It’s likely that you’ll need professional advice for any or all the following aspects to set up your self-managed super fund.

Determine your SMSF structure

Your SMSF can have up to six individual trustees or a corporate (company) trustee. An SMSF Trustee is responsible for:

• Preparing an SMSF investment strategy
• Making investments
• Accepting member contributions
• Paying member benefits
• Appointing an auditor who is registered with the Australian Securities and Investments Commission (ASIC) to conduct an SMSF audit
• Lodging the self-managed super fund’s annual tax return with the ATO
• Keeping the records of the SMSF to ensure compliance with superannuation legislation

Establish your SMSF trust deed

This trust deed will be a legal document setting out the rules for your SMSF’s establishment, operation, and administration. Note that these rules must be compliant with superannuation legislation.

Information contained in the deed will typically include:

• The name(s) of the trustee(s)
• The objectives of the SMSF
• Member eligibility
• Whether the self-managed super fund benefits will be paid as a lump sum or as an income stream
• An exit strategy: this should outline the circumstances where the SMSF will be wound up and how member benefits would be paid in those circumstances (e.g. the payment of death benefits)

Register your SMSF

Every SMSF must be registered with the ATO to be eligible for the superannuation tax concessions that are available. This means you will need to apply to the ATO for a tax file number. Also, you can apply for an Australian Business Number (ABN) at the same time. If you intend to have a corporate trustee, the corporate trustee will need to be registered with ASIC.

Set up a bank account for your SMSF

Your SMSF will need to have a bank account that is separate from its members’ individual accounts. Member contributions are fund income is paid in to this account. Member benefits will also be paid from this account.

Create an investment strategy

An SMSF needs to have a documented investment strategy outlining how it will invest member funds. Fund investment options can include fixed interest, share, and property, or related products.

The investment strategy should consider:

• The personal circumstances of members (e.g. their age, financial situation, and risk profile)
• The benefits of a diversified investment strategy to reduce risk
• The liquidity needs of the fund and how easily its investment assets can be converted into cash. For example, to pay for the retirement benefits of the SMSF members
• The insurance needs of fund members

An SMSF (Self Managed Super Fund) must have a trustee structure. A trustee is a legal term that refers to an individual or corporation who manages assets that are held in a trust.

A trust is another legal term that refers to an arrangement where trustees hold assets on behalf of beneficiaries.

So, an SMSF has trustees that are responsible for managing assets for the benefit of the SMSF members.

Under Australian SMSF supervision legislation, you can set up an SMSF with one of two potential structures:

• Two to six individuals
• A company.

There is no cost for having individual trustees for your SMSF.

If you are going to set up a company structure, there is a fee charged by the Australian Securities and Investment Commission (ASIC) to register the company. There is also an annual review fee.

Neither individual nor company trustees can charge for the services they provide to their SMSF.

What are the eligibility requirements for individual trustees of an SMSF?

• A single-member self-managed super fund must have two trustees. One of them must be the fund member. The other cannot be the employer of the fund member unless they are relatives.
• Self-managed super funds with more than one member (they can have up to four) can have up to four trustees. All of them must be members of the SMSF. They cannot be the employer of another fund member unless they are relatives.

What are the eligibility requirements for company trustees of an SMSF?

• A single-member fund can have a company with a maximum of two directors. The SMSF member must be a director of the company (either the sole director or one of the two directors). If there are two directors, the fund member cannot be an employee of the other director unless they are relatives.
• Self-managed super funds with more than one member can have a company structure provided that each member is a director and vice versa. A member can’t be the employer of another member unless they are relatives.

When a person stops being a member of the SMSF, they automatically cease to be a company trustee under this type of self-managed super fund structure. ASIC and the Australian Taxation Office (ATO) must be notified.

Who owns the assets in an SMSF?

The trustees have the title to all assets within the SMSF.

The fund’s assets must be kept separate from the assets that fund members personally hold. This can be easier to do with a company structure.

If an individual trustee is removed or an additional one is added, the titles to SMSF assets must be changed. This can be costly and time-consuming because there may be State government and/or bank fees involved in changing the ownership of the assets in the fund.

This is not necessary under a company structure, because the title to the self-managed super fund’s assets is in the registered company’s name.

The trustees are responsible for administering the SMSF. Failure to comply with superannuation legislation can result in financial or other penalties. SMSFs must have an annual SMSF audit to ensure compliance.

If the trustees are ever sued for damages, a company structure for a self-managed super fund offers greater protection because companies have limited liability.

SMSF succession planning

It can be useful to develop a succession plan when setting up your SMSF. This plan should outline what the fund will do if one of your trustees ceases to remain a member (for example, due to death or incapacity).

With a company structure for your SMSF, it can continue as a legal entity indefinitely. The control of the SMSF and its assets remains with the company.

It’s a legal requirement for an SMSF to have an investment strategy. Your fund’s compliance with this strategy is one of the things that is checked as part of your annual SMSF audit.

It’s the responsibility of the SMSF Trustee to develop an investment strategy to set up an SMSF. The trustees are also responsible for ensuring that all SMSF investment transactions are made following the strategy.

Major considerations when developing a self-managed super fund investment strategy include:

• The benefits of a diversified investment strategy to reduce risk. Investing in different types of assets (e.g. fixed interest, property and shares) helps to spread your risk. If one sector isn’t performing as strongly, others may be able to compensate. You’ll be less exposed to downturns or flat periods in a single asset class.
• The personal circumstances of members (e.g. their age, financial situation and risk profile).
• The liquidity needs of the fund and how easily its investment assets can be converted into cash. For example, to pay for the retirement benefits of the SMSF members.
• The insurance needs of fund members. For example, life insurance covers the debts of each fund member.

The investment strategy should be reviewed regularly to ensure that returns are meeting objectives and member needs.

Are there any restrictions on SMSF investments?

Yes.

All the investments made by your self-managed super fund must be what is known as “arm’s length” transactions. This means that you generally can’t:

• Buy assets from your SMSF fund members, their relatives or related parties (with a few exceptions, see the next heading in this article). Related parties include business partners of any fund members, as well as any companies or trusts that members may be involved with. It also includes any employers who may contribute to the SMSF on a member’s behalf).
• Lend money to SMSF fund members, their relatives or related parties (with a few exceptions, see the next heading in this article). Any other loans that may be made by your self-managed super fund must be on commercial terms and in the best interests of members. They must also comply with the fund’s investment strategy.

All your SMSF investment transactions must reflect the true commercial values of asset purchases and sales.

Your fund also cannot borrow money to invest. If you need to arrange funds for SMSF property investment, you need to set up a trust under a limited borrowing recourse arrangement. Legal ownership of the investment property will remain with the trust until the investment property loan is repaid. It is then transferred to your self-managed super fund.

Your fund also cannot buy any collectibles or personal use assets that are going to give any present-day benefit to members. For example, cars or boats. This is because a self-managed super fund must meet the sole purpose test of providing for members’ retirement.

What are the exceptions to acquiring SMSF assets from related parties?

Certain assets can be acquired by your self-managed super funds, provided they are bought at market value. These assets include:

• Listed securities (for example, shares)
• Business land and property
• In-house assets that are less than 5% of your SMSF’s total value. These in-house assets include loans to family members

What if I don’t comply with investment restrictions with my SMSF?

If you don’t comply with self-managed super investment restrictions, there can be significant penalties imposed by the Australian Taxation Office. You can lose your SMSF tax concessions and the trustees of your fund can even be disqualified and prosecuted.

Except for not being able to undertake the annual SMSF audit, there are many options available to you as an SMSF trustee as to how you can administer your SMSF. Some of these options are:

• Outsource all tasks: engage professionals to undertake all tasks associated with the administration and management of your super fund;
• Outsource some tasks: engage professionals to undertake some tasks. Often, this means using a fund administrator to prepare accounts and lodge income tax returns and engaging a financial adviser to assist with investment decisions; or
• Undertake all tasks: this means making all the investment decisions, preparing the annual accounts and tax returns and maintaining all records.

It is certainly possible to undertake all tasks. However, most SMSF trustees would at least engage an accountant to prepare the accounts and tax return and many also engage a fund administrator and/or financial adviser.

Keeping assets separate

One important thing that some trustees/members fail to understand is that an SMSF is a separate legal entity and that the responsibilities of the person as a trustee or director of the trustee company differ from those of the individual as the member of the fund. In some cases, trustees/members mix their assets with those of the superannuation fund. This must be avoided at all costs for many reasons, including compliance with the covenants in s52 of the SIS Act, potential bankruptcy implications and relationship breakdowns.

All assets should be recorded as belonging to the SMSF. This is relatively easy for bank accounts, term deposits, managed funds and shares. The following terminology should be used for these types of assets.

Individual Trustees: John & Mary Citizen <J & M Citizen Superannuation Fund A/c>

or maybe written as:

John & Mary Citizen ATF J & M Citizen Superannuation Fund

Corporate Trustee: Citizen Holdings Pty Ltd <J & M Citizen Superannuation Fund A/c>

or maybe written as:

Citizen Holdings Pty Ltd ATF J & M Citizen Superannuation Fund

Note: ATF means “as trustee for”.

If you have four or more individual trustees for a fund and have share investments, you will probably not be able to record all trustee names. You will need to minute this and will probably need to use the same trustees only on the bank account as the account may need to be in the same name as the shares for dividend payments to be received. Additional trustee/s can be signatories on the accounts.

With real property assets, many land title offices will not record that an asset is held in trust. The title deeds will therefore only record the name of the trustee. As ownership is not recorded on the title further documentation is required.

• Suggested documentation for these situations are:
• Minute recording purchase of asset;
• Copy of cheque used for payment or electronic payment details; and
• Deed of trust

The above documentation (as for real property) would also be required for the purchase of other assets eg works of art, coins and other collectables. Receipts for such purposes and insurance documents should contain the same terminology as for bank accounts/shares, etc.

Basic SMSF administration

As a trustee, you are responsible for the administration and keeping records for your fund. Many fund administrators will only keep copies of original records, so you will be responsible for keeping the originals.

Good recordkeeping involves more than just knowing which records to keep and for how long – it is a legal requirement. A good recordkeeping system will also make it easier to:

• Complete the fund’s audit and annual return;
• Monitor the financial situation of your fund to assist you in making sound investment decisions; and
• Make the best use of any professionals you engage.

It is usual to establish a system that separates the more permanent records from the records that relate to a specific financial year. Permanent records would include:

• The SMSF trust deed (old and current);
• The SMSF investment strategy;
• Minutes of trustee meetings (usually kept in a separate file in date order);
• all signed trustee declarations;
• Records of trustees consenting to their appointment as a fund trustee; and
• Records of all changes in fund members and trustees.

Records relating to a specific financial year would include:

• Documents to explain the fund’s income eg bank and dividend statements;
• Receipts for deductible expenses;
• Other information used to prepare your fund’s returns, accounts and Statements eg source documents for ownership and valuation of assets eg CHESS statements, and purchase documents;
• Documents used to calculate your fund’s income tax liability, including copies of IAS/PAYG statements; and
• Other documents required by an independent auditor to determine how your fund has complied with the super laws.

It is recommended that you consult with your advisers as to the most effective record-keeping system as they may have specific requirements.

It is also important that as a trustee of an SMSF you keep proper and accurate records of any significant investment decisions eg purchasing a property, or transferring shares in a specie from a member. This is usually in the form of a minute and should include:

• Why a particular investment was chosen; and
• Whether all trustees agreed with the decision.

If one trustee uses the fund’s resources to invest in an asset that fails and there is no documentation, the other trustees may take action against you for failing to be diligent in your duties. If the investment decision was recorded in meeting minutes that were signed by the other trustees, then there will be a record to show the other trustees agreed with your actions.

Document retention

The following records for a minimum of five years:

• Accounting records that explain the transactions and financial position of your SMSF;
• An annual operating statement and annual statement of your SMSF’s financial position;
• Copies of all SMSF annual returns lodged;
• Copies of any other statements you are required to lodge with the ATO or provide to other super funds.

The following records need to be kept for a minimum of 10 years:

• Minutes of trustee meetings and decisions (where matters affecting your fund were discussed);
• Reasons for decisions on the storage of collectables and personal use assets;
• Records of all changes of trustees;
• Trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee;
• Members’ written consent to be appointed as trustees; and
• copies of all reports given to members.

In addition, the normal income tax record-keeping requirements need to be maintained eg for deductions and capital gains. Generally, deduction records need to be kept for five years after the date of lodgement of the relevant income tax return and capital gains records for five years after the last capital gain event relating to the asset.

Lodgment and payment obligations

The key dates for the lodgement of income tax and regulatory returns and the payment of any tax due are as follows.

• 31st October: this is the lodgement date for funds where prior year income tax returns were outstanding as at 30 June.
• 28th February: the income tax and annual return for new self-managed super funds are due on this date. Payment, if required, is also due on this date.
• 31st March: where a super fund has not appointed a tax agent, their return is due for lodgement and any outstanding tax due for payment on this date.
• 15th May: the returns for all remaining super funds and tax agent clients not allocated to other categories are due for lodgement and any tax is due for payment on this date.

It’s a legal requirement for an SMSF Trustee to consider taking out insurance coverage for their SMSF or Self Managed Super Fund. This is part of developing the SMSF investment strategy to set up an SMSF.

When deciding whether to take out SMSF insurance, trustees need to consider the needs and financial situation of each fund member. For example, how much debt they currently have and how they currently provide for their dependants.

What types of insurance cover can an SMSF take out for its members?

A self-managed super fund is generally eligible to take out cover for any of the following member events:

• Death (life insurance). A lump sum is generally paid to the SMSF member’s beneficiary (or beneficiaries) when they die.
• A terminal medical condition (often available as an additional potential benefit with life policies).
• A permanent or temporary incapacity that prevents the member from continuing to work (disability or income protection insurance).

A self-managed super fund member will usually be required to undergo a medical exam for any cover to be approved by an insurance company.

Any self-managed super fund insurance policy must be taken out for the sole purpose of benefiting the insured or their beneficiaries, not any other independent member of the fund.

Any benefits payable under SMSF insurance policies must be paid to the self-managed super fund trustee for subsequent distribution.

The self-managed super fund pays for the cost of the premiums for any cover that is taken out on behalf of members. This reduces the amount that is invested by the fund for each member in income and growth assets.

However, the SMSF can deduct the cost of these premiums from the income it generates and reports on its annual tax return each financial year. This will reduce the amount of tax it pays.

Can I have trauma insurance in an SMSF?

Generally, no.

Trauma insurance is usually paid as a lump sum if an insured person is diagnosed with a critical illness or injury that is specified in their policy.

These events commonly include heart attacks, strokes or cancer diagnoses.

These types of insurance payouts are usually made regardless of whether the insured person continues to work again or not.

These payouts, therefore, don’t always qualify as a superannuation condition of release. For that reason, they are generally not allowed to be included in the cover of SMSF members.

SMSF rules are strict when it comes to administration. It is a legal requirement that your SMSF be audited each year, even if no super contributions or payments have been made. The audit must happen at least 45 days before the date you need to lodge your fund’s annual tax return.

Your SMSF auditor must be registered with the Australian Securities and Investments Commission (ASIC). Their registration number must be provided on your annual self-managed super tax return.

They must also be independent of your fund. That means they can’t be a member of it, nor can they be in a close personal or business relationship with any of its members or an SMSF trustee.

What happens in an SMSF audit?

An SMSF auditor will:

• Examine your fund’s financial statements. It’s best if these statements are prepared by your accountant. These statements will reflect information about your self-managed super accounts and transactions for the financial year (for example, details of fund investments and member contributions and/or payments).
• Assess your fund’s compliance with superannuation law. If there are specific breaches, they must report them to the ATO. They will also advise the self-managed super fund’s trustees of these breaches, which should be rectified as soon as possible.

What records do I need for an SMSF audit?

SMSF trustees are required to ensure that accurate financial records are kept. SMSF auditors any request for any or all of the following information:

• Minutes of all investment decisions made (including why a specific fund investment was chosen and whether all fund trustees agreed with the decision). These minutes must be kept for a minimum of 10 years.
• Accurate and up-to-date accounting records for a minimum of five years. These records should outline the SMSF’s annual transactions, operating statement and financial position.
• Copies of a self-managed super fund’s annual tax returns for the past five years.
• Records of any changes in SMSF trustees for the past ten years.
• Trustee declarations of obligations and responsibilities for at least ten years.
• Copies of all reports given to the self-managed super fund members over the past ten years.
• Documents explaining how any collectable and personal use assets that the fund may have been stored. Records of this must also be kept for a minimum of ten years.

Any information that your SMSF auditor requests must be provided within 14 days.

How much does an SMSF audit cost?

The most recent data available from the Australian Taxation Office (ATO) shows that the annual audit fees for the majority of SMSFs are less than $1,000. The amount charged varies depending on factors such as:

• The complexity of the SMSF, the SMSF investment strategy and the number of transactions made.
• The number of members in the SMSF
• Whether the fund has members in the accumulation and/or pension phases.

When do I have to lodge my SMSF tax return?

Not all SMSFs have the same lodgement due dates each financial year for their annual tax returns. Your accountant or tax agent will be able to advise you on your due date.

Failure to lodge by the due date can incur penalties and the loss of your SMSF tax concessions.

If you manage your own SMSF, then you likely are aware that there are a plethora of rules and regulations that trustees have to abide by when they are making decisions for their SMSF.

Unfortunately, some trustees try to do things themselves and in some cases get things seriously wrong. Some mistakes can be very costly so it’s important that you, as a trustee of your SMSF, know the traps and avoid them at all costs.

The following are a few case studies taken from real-life examples. Learning the lessons from these case studies should hopefully help you avoid them down the track.

Wrong ownership

One of the first things that an auditor will look at in an SMSF audit is that all the assets of the SMSF are held in the name of the superfund. Here is the story of an SMSF trustee who got this wrong from the very start:

Steve* had just started his SMSF as a result of a property guru convincing him that it would be a good idea to buy a residential SMSF property investment. They had charged him very high fees to set up his SMSF and organise the purchase of a property. Steve had rolled over his industry super fund into his SMSF and used these funds for the deposit on the property but he had signed a contract on the property in his name and to make matters worse, had taken out a loan in his name to fund the purchase.

It came time for Steve to organise the first year’s annual compliance work (financials and tax return) for his new superfund. Unfortunately for Steve, there was no way to lodge a tax return for his SMSF without the fund becoming non-compliant.

Steve had two possible solutions to solve his ownership problem. One solution was to get a personal loan for the amount of the deposit paid to purchase the property and pay that money back into the SMSF. The other alternative was to visit his bank, explain the issue and request that the loan be transferred to the SMSF’s name and at the same time get the ownership of the property transferred to the SMSF as well.

There would be significant costs involved in the second option including the costs to set up a company and bare trust and the additional stamp duty to change the ownership. The costs of ignoring the issue and not adopting either of the solutions could potentially be hefty fines from the ATO as well as possibly the loss of up to 47.5% of the value of the fund’s assets

However, if Steve could demonstrate that while he had done the wrong thing in using SMSF funds to fund a personally held asset, he had realised his error and fixed the problem then the ATO would possibly be more lenient and the financial cost to the super fund itself could be mitigated. Again, unfortunately for Steve, despite advice and assistance from his accountant, he was unable to deal with the problem emotionally and refused to deal with the problem promptly, so much so that even after another 18 months the problem still wasn’t fixed.

Key takeaways:

• Always seek advice from an expert before you set up an SMSF.
• Explore the costs involved before you engage someone to help you to make sure you aren’t being ripped off.
• Seek advice before making a major purchase or investment in your SMSF– the ramifications of getting it wrong can be expensive to fix.
• If you make a mistake, fix it as soon as you can, and tell the ATO about it. The ATO have special channels open to SMSF trustees to report potential non-compliance issues. They want trustees to be compliant and they help as much as they can where trustees are trying to fix the issues and do the right thing.
  bronze safety deposit boxes

SMSF trustees are accountable

Fred* had been ‘managing’ his SMSF for over 8 years but had not organised for the compliance work to be undertaken for the last six years.

He arrived at his accountant’s office with boxes of folders and had quite a lot of supporting documents filed in various places. After hours of trying to marry up supporting documents to the transaction in and out of the bank account the accountant finally discovered that the client had used his SMSF money to fund a 1/3 share of a property development deal.

In and of itself, this can be done by an SMSF. However, some issues were identified that caused a great deal of extraneous work and costly fixes for the SMSF:

• There was no written agreement anywhere on file and he was unable to provide one. The 1/3 ownership was only evidenced by references to 1/3 payments and 2/3 reimbursements on the bank statements.
• The SMSF bank account was used to pay for up to 100% of expenses relating to the development and on occasion received money from the other 2 ‘partners’ to reimburse the SMSF for their share of the development expenses.
• There was no supporting documentation provided for the development even though the SMSF bank account was used to fund it. Fred’s view was that other people looked after all that so he believed that the SMSF didn’t need any supporting documents.
• The SMSF’s proceeds from the sale of the property were only banked 12 months after the actual sale but there was no contract of sale provided to support this.

In addition, Fred had:

• Loaned his son money from the SMSF and
• Taken money from a friend to ‘invest’ in shares on his friend’s behalf in the SMSF and then paid that money back in bits and pieces over a 2 or 3-year time period.

Very luckily for this client, the issues were largely solved by completely ignoring the fact that SMSF money was used to bankroll a property development. As there was no evidence of ownership, it was easier to treat all the incoming cash as either personal super contributions and all the outgoing cash as SMSF pension payments. However, this solution only worked because Fred had:

Reached preservation age and could technically withdraw funds from the super fund; and
Was also still working so was eligible to contribute to the SMSF.
If he hadn’t met both of these criteria he would have breached the rules and his fund would have been non-compliant. Luckily, he only got away with having to pay fines for late lodgement and a very big accounting bill.

Key takeaways:

• Clear ownership of assets is a must for SMSF investments.
• If an SMSF pays for expenses that aren’t related to the SMSF then these either need to be reimbursed or treated as a lump sum or pension withdrawal if possible.
• An SMSF can’t lend money on an ad-hoc basis, especially to family members. If there is no agreement in place it could be a breach of the arm’s length rules and potentially the in-house asset rules. All loans must be on an arm’s length basis – this means that there needs to be a formal loan agreement with a set payback date and there must be market-rate interest charged.
• An SMSF can’t borrow without a limited recourse borrowing arrangement in place and certainly can’t borrow from a friend to invest in a range of shares.
• Data entry costs you money. Every line item in an SMSF bank statement has to have a corresponding entry in the bookkeeping software used to produce the end-of-year financials and tax return – this is an audit requirement. So whereas an accountant can sometimes do end-of-year summary transactions for a small business this isn’t the case for an SMSF. This means that the more times you transfer money between accounts, make super contributions, take out money, and buy and sell shares – the more you are going to be charged in fees. You needn’t let this restrict the way you operate your SMSF but think about whether what you are doing is necessary. In this case study, the client treated his SMSF bank account as his account – there were hundreds of small withdrawals for a range of building costs, rates, and family loans, each of which had to be entered and accounted for separately – time-consuming and very costly.
• Every transaction should have some form of supporting documents to satisfy audit requirements. These include documents like dividend statements, rates notices, contract notes and receipts for SMSF-related expenses like accounting.

SMSF funds are not your money

James’s* SMSF had not lodged a tax return for 5 years and in the last return that was lodged, the SMSF was fined 46.5% of the value of the fund because James had taken out funds to keep his business afloat even though he didn’t meet any of the conditions of release.

There were four members of the fund, James and his wife and their two sons. James had not told any of the other 3 members of his actions in taking out the funds to provide to his business or of the ATO’s subsequent penalties.

The SMSF’s returns and financials were bought up to date. However, the fund wasn’t able to be closed down due to the large debt owing to the ATO. Even with selling the SMSF’s one asset, there was still a considerable shortfall owing to the tax office and of course, there were no funds left for any of the members. The ATO could potentially target the assets of the trustees outside of super.

Key takeaways:

• All trustees must be involved in decision-making, as all trustees are jointly responsible and liable.
• Your member balance in an SMSF is not your money to do with whatever you like – there are rules surrounding how and when you can access your funds.
• Always ask for advice if you are unsure what you can and can’t do in your SMSF.

The sole purpose test

The value of Brian’s* SMSF was down to $280,000 from about $600,000 the prior year. Brian had invested in 2 speculative mining companies, one of which had stopped trading and one had fallen in value by about 90%. The remaining assets in the SMSF were held in cash.

The accounting for Brian’s SMSF was very straightforward. There were no issues with bank statements or supporting documents as it was all provided. Brian even asked for advice on how to contribute as much money as possible to fund in the current year. This was easy for the accountant to provide advice on – a mix of concessional (he was self-employed) and non-concessional using the bring-forward rule.

Brian then proceeded to let the accountant know that he intended to trade Forex with the contributions. Let’s be clear here, accountants are not able to provide any financial-related advice so have to be careful how they approach situations where they feel uncomfortable with how the client is considering managing his fund. All the accountant could officially do was stress the importance of the sole purpose test and how the investment strategy needed to match the assets held by the fund.

Key takeaways:

• Always ask if what you are doing or is what you are investing in going to meet the sole purpose test and what is your reasoning.
• Make sure your fund is diversified.
• Make sure you consider risk as part of the SMSF investment strategy and in the day-to-day investments the fund makes.

Other common mistakes

The following are a list of mistakes that are easy to make but if you know the basics of the SMSF rules, which you are obliged to know as an SMSF trustee, then they are easy to avoid:

Cashflow in retirement
With the increasing trend of purchasing property in an SMSF, cashflow in retirement, if the pension is supported with underlying property assets, can become an issue. If there are no other assets to pay a pension other than property, what are the trustees going to do when the minimum withdrawal rate is higher than the rent received? If minimum pension payments aren’t met, pension mode may cease or decrease significantly and if you have to sell a property then capital gains may have to be paid on part or all of the gain.

Short term loans to the fund
We touched on this earlier in one of our case studies but another example is when the super fund needs a short term loan to cover an expense or a deposit. Trustees might think that loaning funds to the SMSF and paying them back when funds are available is ok, but the practice is fraught with danger and not encouraged. If money put into the fund is not repaid within a reasonable timeframe it would need to be treated as a contribution and couldn’t be reimbursed.

Paying SMSF expenses from personal accounts
This is not best practice and is not encouraged. A better way would be to ask for bank details and do a bank transfer or if all else fails write a cheque. If there is absolutely no way of avoiding using a personal credit card as some suppliers only have a single method of payment then the solution is as soon as practical the SMSF must reimburse the member for the payment of the SMSF expense and a file note or minute made of why the member had to pay for the expense personally. Where it gets problematic is when the trustee forgets to reimburse themselves for the expense.

In this case, the expense has to be treated as an optional contribution and cause problems if a member has already reached their contribution limits. It can also mean that the SMSF loses out on a legitimate tax deduction if the trustee is unable to provide a receipt.

Not drawing down minimum pension payments
If you have a pension, you know that there is a minimum percentage you have to draw which is based on your age and the starting balance of your pension account. Withdrawals need to be managed and if the minimums are not met this causes a problem. A pension has to be commuted, a new smaller amount pension has to be backdated and commenced, and an actuarial certificate has to be paid for to work out what’s taxable and what’s tax-exempt all for the sake of not managing the withdrawals. This issue is now compounded because the ATO has moved to a real-time reporting regime so this solution may not work in future as the ATO will have to be notified of pension changes within certain timeframes.

If you have read the case studies and the costly mistakes and are thinking, it’s all too hard and dangerous, then please be reassured that it needn’t be. With just a few simple guidelines in place that you impose yourself, a basic understanding of the ATO rules and asking for advice from your SMSF accountant, managing your SMSF needn’t be a major problem.

*Names have been changed

The winding-up of an SMSF is the process of paying out or rolling over of fund assets. The wind-up happens after the completion of final reporting and administrative requirements.

The SMSF trustee may wish to wind up their fund for many reasons:

• all/most members have left the fund due to death or rolling funds into another fund, etc.;
• insufficient or no assets remaining due to payment or rolling over of benefits, etc.;
• inability/unwillingness of the trustees to continue as trustees due to age, etc.; or
• moving overseas.

In some cases, particularly moving overseas, an alternate structure for the assets may be appropriate.

You may need to engage a professional (e.g. accountant or administrator) to undertake these tasks. However, you need to understand what is involved as the trustees are ultimately responsible.

There are steps in winding up an SMSF which are listed below. One important point to remember is to not close your bank account(s) until the ATO has confirmed that the fund has been wound up.

Steps to wind up an SMSF

1. Read the trust deed

The trust deed may contain information about winding up your fund.

2. Prepare a set of interim accounts

Prepare a set of interim accounts to determine member balances. Remember to take into account any tax payable and/or refunds due. It is usual for your accountant/auditor to provide a fixed quote for final services so these can be included in the SMSFs liabilities and sufficient cash retained to make these and any other payments (e.g. tax and/or supervisory levy). Other costs may include the closing of trustee companies and the vesting of bare trusts if LRBA arrangements are paid out.

3. Rollover member benefits

All benefits must be rolled out per both the SIS Act and the trust deed, and you need to use SuperStream to facilitate the rollovers. You may need to wait until any tax refunds are paid before you can pay out all member benefits.

There are a few ways that rollovers can be initiated:

• through your my.gov account
• by completing rollover request forms provided by the receiving superfund and instructing them to initiate the Superstream rollover request
• by generating a Superstream request through your superfund’s accounting software – your accountant or super fund administrator should be able to help with this

4. Arrange for a final audit and the final SMSF annual return

Your SMSF needs to have a final SMSF audit done before you can lodge your final annual return. This return will include filling out the ‘wind up’ labels on the return and finalising any outstanding tax liabilities.

5. Receive confirmation from the ATO

If everything is done correctly, the ATO will send you a letter stating that they have cancelled your SMSFs ABN and closed your SMSF records on their system.

6. Close your SMSF Bank Account(s)

Once you have received the ATO confirmation that your fund has closed, you can close your SMSF bank accounts.