Are you considering setting up a self-managed superannuation fund (SMSF)? If you are, you should know that there are many rules and regulations set by the Australian Taxation Office (ATO) that you must be aware of, and comply with, if your fund is to remain compliant and attract tax benefits.
Knowing these rules and regulations in detail before you start will set you on the right path to building retirement wealth, but what is equally important is knowing that there are some things you cannot do with your SMSF. As fund trustee, you are responsible for making sure that the fund complies with all regulatory and compliance obligations. Failure to do so could see your fund hit with significant penalties and possible loss of its complying status.
As a quick example, here are five common things that some trustees have been found to be doing that have attracted the attention of the regulators.
Using the SMSF to Provide Financial Assistance to a Family Member
Trustees can purchase property as an investment for the fund, and some have leased this property to a family member. Their argument for this arrangement is that it is no different from leasing to a stranger, and they fully intend to operate it on commercial terms. However, their close family relationship prohibits this. The arrangement is considered to be providing financial assistance to a family member and also fails the sole purpose test.
Using Borrowed Funds to Improve Properties Owned by the Fund
What is important to know is that you can make improvements to property assets, provided the extent of the improvements does not change it into a different asset. To clarify that statement further, the improvements must not change the character and nature of the property.
The trustees can make these improvements using the SMSF’s own resources, that is, cash, but they cannot borrow to do so. The ATO does allow the fund to borrow for the acquisition of a single acquirable asset, as well as any costs associated with repairing or maintaining the asset, but not to make improvements.
Not Keeping Personal or Business Assets Separate from Those Held by the SMSF
This should be a “no-brainer”, especially as many trustees of SMSFs are business owners or managers. Keeping personal and business income and expenses separate has been a fundamental part of our tax structure for decades, so it should be second nature to run an SMSF the same way. However, there have been cases where the trustees have not kept records sufficiently detailed to show this separation.
Investments on behalf of the SMSF must be registered in the name of the fund with all trustees shown as signatories. They must not be used for personal or business purposes under any circumstances. To do so is a breach of superannuation law, which states that the purpose of fund investments is to provide for members in retirement.
Using SMSF Funds to Buy Residential Property for Yourself
This makes perfect sense if we go back to the sole purpose test, that is, the fund exists to provide for its members in retirement. Superannuation rules state that the trustees cannot get a benefit from their fund until they are retired. This means that you cannot buy a house to live in, regardless of the circumstances, including a holiday house through your own SMSF.
Fail to Properly Discharge Your Duties as Fund Trustee
This is one area a trustee cannot ignore. The penalties for non-compliance with the administrative and regulatory requirements are severe. Lodging all the forms and returns correctly and on time each year is part of the responsibilities of being a trustee. Doing this will keep your fund compliant. You must therefore make sure you understand and also discharge all these responsibilities.
If this all seems too much work, and changes in superannuation laws and regulations are becoming too frequent and complex, there are options available. There are now several companies in the superannuation industry, such as SMSF Assure, that provide a range of services to trustees to help them keep their funds compliant.