Self-managed superannuation funds (SMSFs) now account for the management of almost one-third of all superannuation in Australia. They have become popular with many Australians over the last decade as an SMSF enables one to use their super towards additional strategies such as purchasing an investment property, taking more control of your superannuation or enable you to purchase some business assets. Strategies that may not be possible with traditional industry or retail superannuation funds.
The ATO reports every year a summary of all the breaches SMSFs make. A breach is where the Trustees of an SMSF have done something that contravenes the superannuation rules. Around 2 per cent of all SMSFs report a breach each year. Thankfully, half of these funds have rectified the breach before the financial year is over.
Here are a few tips to help you ensure your SMSF is always compliant, as told to Morningstar by CreationWwealth financial planner, Andrew Zbik.
The buck stops with you
Even if you engage the services of an accountant or a financial planner, as Trustee of your own SMSF, the buck stops with you. It is the responsibility of the Trustees to ensure the fund acts within the rules and laws of the superannuation system.
The easiest test I share with clients is the “sole purpose test”. This test states that all the investment activities of the SMSF must be for the sole purpose of generating capital growth and income return to support the provision of an account based pension at retirement.
For example, if your SMSF purchases an investment property and leases the property to an unrelated tenant at markets rates – the SMSF meets the sole purpose test. However, if the SMSF purchases an investment property and anyone who is a member of the fund or deemed to be a related party of a member of the fund uses that property the sole purpose test is breached.
This includes any siblings, children, or blood or marital relatives of an SMSF member as well as any business associates. The reasons are a benefit other than providing for a pension is being received by a related person to the fund – i.e. the enjoyment of the property.
Another common breach made by SMSFs is in an area called in-house assets. An in-house asset is where a fund may partially own an interest in an investment that is also owned by one of the members of the SMSF. For example, shares in a private company.
There are limits of how much of the SMSFs assets can be allocated to in-house assets – a maximum of 5 per cent. This is one of the most common types of breaches. Without good record keeping of the fund’s investment activities and the decisions made by the Trustees, breaches around areas such as in-house assets become common.
I always ensure we have accurate notes that summarise any conversation or meeting with have with clients so that we always have a record of our decisions and the position of the SMSF. With new continuous reporting obligations set by the ATO, if your accountant is not moving your SMSF to a monthly reporting basis its time to get a new accountant.
Additionally, I always pre-schedule my next review with clients six-months in advance. This way we are always on top of the financial position of the SMSF.
Don’t be cute
SMSF rules and regulations are not something to be pushed. Sometimes clients will ask me to push the boundaries with what an SMSF can do.
Another common breach by SMSFs is that they lend money to their members. A BIG NO NO! After reminding clients that the consequences of being rendered a non-complying fund is that 45 per cent of the gross value of the fund’s assets will be paid to the ATO – seems to always stop any attempts to push the boundaries.
Ultimately, if you ever have any ideas about making a new investment decision in your SMSF ask your Adviser first. Thanks to the diligence of my clients asking first I have stopped many bad investment ideas before they were made.
This article originally appeared in Morningstar on the 23rd May 2018. References to Andrew Zbik have been amended to mention CreationWealth.