Managing the investments of an SMSF is very important to ensure the interests of the fund members and that it is compliant according to the laws of Australia. The fund’s investments should be separate from an individual’s personal investments and business affairs of the members of the fund. Your personal business should be separate from the affairs of your fund.
I. The SMSF Investment Strategy
Before making investments, the SMSF should have an investment strategy. The strategy sets the fund’s investment objectives and the specific types of investments that the fund will make. The SMSF investment strategy should be written and must be reviewed regularly to ensure that the purpose is continued and circumstances of the fund and its members are taken cared for. It should also consider the insurance cover for each member of the fund, like life insurance.
When you are preparing and reviewing your SMSF investment strategy, you should consider the personal circumstances of the members, their age, and tolerance for risk. You also need to consider diversifying or investing into a varied range of assets and asset classes, the liquidity of the fund’s assets and how they can be converted to cash easily to meet the expenses of the fund, the fund’s ability to pay benefits if members retire and other related costs that may occur, and the members’ needs and circumstances.
II. Sole Purpose Test
The SMSF should meet the sole purpose test for it to be eligible for tax concessions available for super funds. The fund needs to be maintained for the sole purpose of giving retirement benefits to the members, or to their dependents if a member or trustee dies before retirement.
Breaches in the sole purpose test is serious. The trustees could face civil and criminal penalties and lose concessional tax benefits if the test is breached. The sole purpose test is not met when you or anyone else among the members directly or indirectly gets financial benefits when making SMSF investment decisions and arrangements aside from increasing the fund’s returns.
You also need to make sure that members do not have access to the assets of the SMSF. The SMSF will also fail the sole purpose test if it provides pre-retirement benefits to someone like personal use of a fund’s asset.
III. Ownership and Protection of Assets
The SMSF investment should be managed separately from any personal or business investments of members. Ensuring that the fund has clear ownership of its investment ventures is necessary.
To protect the fund’s assets, they should be recorded in a way that distinguishes them from personal or business assets and that they clearly show that the fund has legal ownership over them. Fund assets, aside from money, should be under the name of either the corporate trustee or individual trustees for the fund. Assets cannot be held in the name of one trustee or member. They cannot also be held by a standard employer-sponsor or associate. However, in certain instances, assets can be leased to a related party of the fund, like business real property or in-house assets. There are also restrictions on the type of assets a fund can invest in. Talk to an SMSF professional to be sure that the SMSF investment you make are compliant with the law.
A company set up is the easiest way that will help a fund comply with ownership rules. A company set up will also serve as the corporate trustee of the fund. If there are changes in the directors of the company, the fund’s ownership documents do not need to change because the trustee of the fund has not changed. Separate corporate trustee lessens the chance of personal assets intermingling with fund assets.
Trustees Joining and Leaving
For individual trustees, if a trustee joins or leaves the SMSF, the names on the ownership documents like title deed must be changed for each fund asset. These changes must be documented in the fund’s records with all the necessary evidence that support the fund’s ownership of the asset. If the fund has four trustees, the names of all the individual trustees should be documented in the fund’s records as owners of the shares.
Assets unable to be held in the fund’s name
Restrictions that prevent the SMSF from holding assets in its name, ownership by the fund must be clearly established. This can be done by creating an instrument or declaration of trust to enable the fund to assert its ownership. Documents like sale agreements should be accomplished in the name of the trustee ‘as trustee for’ the fund.
Limited recourse borrowing arrangements
The SMSF should make sure that correct asset ownership before or after the handing over of the trust asset if you have entered a limited recourse borrowing arrangement.
IV. Restrictions on Investments
SMSF investments should all be made on a commercial ‘arms length’ basis. The true market value of fund assets should always be reflected in the purchase and sale price. Income from the assets should also reflect the true market rate of return. Generally, you are not allowed to buy assets from or lend money to fund members or other related parties and your fund cannot borrow money.
If a fund is non-compliant with these investment restrictions, it is at risk of being penalised. And may risk disqualifying trustees and may even be prosecuted according to the law. To prevent this, it is best to talk to an SMSF professional to make sure that the SMSF investments comply with the law.
V. SMSF and Business
SMSF can carry on a business but the business must be allowed under the trust deed, or work for the sole purpose of providing retirement benefits for the fund members. However, rules governing SMSF limit or prohibit activities available to other businesses. SMSF cannot enter into credit arrangements or have overdrafts. We also suggest you consult a professional before carrying on a business with an SMSF investment.
Other Regulatory Provisions
SMSFs should comply with investment rules and restrictions.
Loans and financial assistance where the business must not involve selling an SMSF asset less than its market value to a member or a member’s relative, purchase an asset greater than its market value from a member or a member’s relative, acquire services in excess of the what the SMSF needs from a member or a member’s relative, and payment of inflated prices for services acquired from a member or relative.
Purchasing assets from related parties. Buying assets for business activities from a member, trustee or other related parties breaches the related party acquisition rules.
Borrowing. To fund the business activities, drawing a bank overdraft or margin lending could breach borrowing restrictions. Borrowing money and placing a mortgage on assets breaches the restrictions on borrowing and charge-over assets.
Arm’s length transactions. Employing or hiring a member or relative and giving them a salary higher than an arm’s length rate could breach this provision.
Collectables and personal use assets. These assets cannot be displayed in the business’s premises.
VI. Tax on Income
The income of an SMSF is generally taxed at a 15% concessional rate. To entitle the fund to this rate, it must be compliant to the laws and rules for SMSFs. For non-complying funds, the rate is the highest marginal tax rate.
Other types of assessable income for compliant SMSFs are assessable contributions, rent, net capital gains, dividends, and interests. It is best to ask help from an SMSF auditor regarding your SMSF investment and income to make sure you are compliant with the laws and rules for SMSFs.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.