Self-managed super funds can get complicated, especially if you are unaware about the SMSF rules. It is vital to understand all the SMSF rules so as not to get penalised or lose your fund. SMSF rules ensure the protection of all parties involved in any transaction incurred in the system.
SMSF is characterised as having:
- Up to four members
- The members must be trustees of the fund and trustees do not get paid for their duties
- The deed of the trust should comply with the Superannuation Industry Supervision Act of 1993 (SIS Act)
- Compliance to obligations must be strictly adhered to,
- Submission and lodgement of annual regulatory requirements and tax return should be made yearly.
The parties involved in running the SMSF are the trustee, SMSF specialist and the Financial Advisor.
The sole purpose test has an objective to ensure that the SMSFs are maintained for the sole purpose of providing benefits to members when they retire. As a trustee of the fund, you should keep in mind that the members should not receive any benefits from the fund before their retirement.
Related Party Transactions
There is a need to ensure that the fund does not transact with other members, relatives of members or related entities to the fund. Relatives mean child, parent, grandparent, sibling, aunt, uncle, niece, great-uncle, former spouses, etc. Other entities include partnerships companies, to trusts where members have control or majority ownership.
As a trustee, you are restricted from lending or investing more than 5% of the fund’s total assets in an in-house asset. An in-house asset is a loan to, an investment in, or a lease with a related party of the fund.
Arm’s Length Transactions
Investments should be sustained and the assets of the fund should always reflect their true market value.
Borrowings and Security
Even if SMSFs are permitted to borrow money under a limited recourse loan arrangement that follows strict rules set out in laws, they should be discussed first with a financial adviser.
Prepare and implement investment strategies for your fund and review them regularly. The strategies should be unique to the requirements of the fund and its members. As a trustee or member, you should ensure that the investments are in line with the investment strategies.
Transfer Balance Cap
The SMSF should ensure that the amount held in the retirement phase does not exceed the Transfer Balance Cap. Transfer balance caps begins at $1.6 million and are periodically indexed in $100,000 increments.
The number of assets that an SMSF can transfer to a tax-free retirement account is limited but will not affect the money retained from the accumulation phase.
Key Steps In Setting Up An SMSF
An SMSF can have up to four member or trustees in an SMSF. This could be individual trustees or a company serving as a corporate trustee.
Trustees must prepare a trust deed. The trust deed is a legal document that states how to establish, operate and manage the SMSF. It should be referred to when making decisions for the fund. Trustees must sign and date the trust deed. It should be executed properly under the law.
Assets are necessary to establish a fund. This may start as a small amount of cash and may add up once the members start rolling over existing benefits or are able to make contributions.
SMSF trustees must prepare a trustee declaration. The trustee declaration states that you understand your duties and responsibilities. The declaration should be signed within 21 days of becoming a trustee or director of the corporate trustee. A signed copy of the declaration must be kept.
The SMSF must be registered through the Australian Business Register. To save tax, elect to be regulated by the ATO. Once you have registered to ATO, the SMSF will be listed on the super fund look up. Other funds and employers can then check your funds’ eligibility to roll overs or contributions.
Before the fund could receive employee contributions, signing up with an SMSF messaging provider is needed. Each member’s Tax File Number (TFN) will be needed for this. If the member does not supply his or her TFN you cannot accept a personal contribution from them and the fund would have to pay more tax on their employer contributions.
SMSF Trustees – Individual or Corporate
When setting up an SMSF you need to decide on the type of trustee for your fund. The fund can have either an individual or corporate trustees. Whichever choice you make, each SMSF member must play an active role in managing the SMSF.
With individual trustees, all members must be trustees. For corporate trustees, all members must be directors of the company.
Which type of trustee will best suit your circumstances?
If you are the only member of your fund, you will still need two individual trustees. You plus another person who is willing to be a trustee and not a member.
If you have a corporate trustee, you can be the single member and the sole director of the company.
Ownership of fund assets must be recorded in the name of all trustees on behalf of the fund. For individual trustees, every trustees’ name must be listed. If a member leaves or joins the SMSF, the ownership documents has to be changed. For corporate trustees, only the company name is listed. So, even if there is a change in the SMSF members, you do not have to change the ownership documents.
There are costs and fees in setting up an SMSF. It may cost a bit more to set up a corporate trustee but this might be a small price to pay compared to the cost and the effort involved in changing ownership documents.
If the SMSF rules are broken, each trustee can be fined thousands of dollars. If you have individual trustees, these would cost more in fines because each individual trustee is fined the penalty. If you have a corporate trustee, it only receives one penalty and the directors share the cost between them.
Talk to us if you want to find out more about SMSF rules, administration, contributions, investing, etc. Our team of SMSF auditors will be happy to help you.
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.