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The top six checklist: is my SMSF on track and compliant?

With the never-ending changes to the super rules you may wonder whether your SMSF is OK or a renovation job is needed to get your fund up to date. Often all the noise about super can be confusing in trying to work out whether your fund is affected. This year there were lots of announcements about super, but few made it into legislation.

Here’s a checklist under six major headings to review your SMSF and see whether it is on track. It covers the vital issues on setting up your fund, investing, obligations as trustee, compliance with the rules, paying benefits and preparing for an eventual exit.

1. Establishing the SMSF properly

When your SMSF was established did you do the following?

Consider appointing professionals to help you set up your SMSF

If you don’t have the skills or experience to manage some features of your fund, you can always access an accountant, financial planner, SMSF administrator to help you. But remember it’s the trustees who are ultimately responsible for running the fund.

Choose individual trustees or a corporate trustee

All members of your SMSF must be trustees of the fund or directors of a corporate trustee. If you are the only member of your SMSF you must have a second individual trustee or may have a second director of the corporate trustee.

Appoint your trustees or directors

The trust deed of your SMSF will provide information on how to appoint trustees. Appointment of a trustee may require another trustee’s or member’s approval.

Create the trust and trust deed

An SMSF is a special type of trust which is established under a trust deed which sets out the rights and obligations of trustees, members and others who have an interest in the fund.

Check your fund is an Australian super fund

If your SMSF is to receive the tax concessions available for superannuation, your fund must be established in Australia, important decisions about the fund are to be made in Australia and there are special requirements for overseas residents who wish to contribute to the fund.

Register your fund with the ATO

Your SMSF needs to be registered with the ATO soon after it has been established to qualify for the tax benefits that are available for super.

Set up a bank account

A bank account for your SMSF is very important as it allows the fund to receive contributions, make investments, receive income and pay expenses.

Get an electronic service address

If your SMSF receives contributions from an employer, it will need an electronic service address to allow the amounts to be credited to your SMSF’s bank account.

Prepare an exit strategy in case something happens to you or another member

An exit strategy is important if it is necessary to wind up the fund due to benefits being transferred to another fund or the members being unable to manage the fund anymore.

2. Checking the investments

When you considered the fund’s investments did you do the following?

Prepare an investment strategy for your SMSF

It is necessary that your fund has an investment strategy that considers the circumstances of the fund including investment risk, diversification and liquidity of investments as well as the member’s situation.

Consider insurance for members

Trustees are required to consider whether insurance should be provided for members as part of the fund’s investment strategy.

Confirm all fund investments comply with the super laws and are allowed under the trust deed

SMSF trustees are required to understand the rules for the fund’s investments as required by the super law and permitted by the fund’s trust deed.

Made provision to regularly review the investment strategy

The investment strategy of your SMSF is required to be reviewed regularly at least annually.

Document any decision about the investment strategy

Investment decisions about the fund should be documented and approved by the trustees.

3. Reporting accurately

As an individual trustee of your fund or a director of the corporate trustee, do you know what you need to report and to who?

Has your SMSF met the following requirements?

Value fund assets at their 30 June market value

The superannuation rules require that the investments of your SMSF are valued at their market value every 30 June. Also, if you commence a pension or pay a lump sum from the fund a member’s balance should be valued on the market value of the fund’s investments.

Pay any minimum annual income stream payments as legally required

Making sure that you pay the minimum pension from your fund is important as it will allow any income earned by your SMSF on your pension account balance to be tax exempt.

Obtain an actuarial certificate if required

In some situations where your fund is paying a pension you may require an actuarial certificate which will tell you how much of the fund’s income is taxable and tax exempt. Your accountant, tax agent or superannuation fund administrator can help you.

Prepare the fund’s end of year financial accounts and statements

Each year your SMSF is required to lodge financial accounts, tax returns and regulatory returns. You are responsible for having them prepared and audited by a qualified professional.

Appoint an approved SMSF auditor not more than 45 days before the SMSF annual return is due

Your accountant or fund administrator can help you locate an approved SMSF auditor or you can access the list of approved SMSF auditors on the ASIC website at asic.gov.au

Lodge your SMSF annual return by the due date

Lodgement of your SMSF annual return with the ATO is something that your accountant or tax agent can assist you with.

Lodge your transfer balance account reports if required

When you commence a pension from your SMSF or convert (commute) the pension to a lump sum withdrawal your SMSF is required to report the amount to the ATO. Reporting dates depend on the total amount you have in super and your accountant, tax agent or fund administrator can help you there.

Review the fund’s investment strategy and document the review

Your fund’s investment strategy is required to be reviewed regularly, which is usually on an annual basis. Make sure if there is no change to the strategy you have kept a minute in the fund records confirming that you have reviewed the strategy.

Maintain all fund records as required under super laws

The super laws require you to keep books and records about your super fund. These are usually stored electronically and include the fund’s accounts, legal documents and trustee decisions. However, there are some books and records that need to be retained for at least 5 or even 10 years even after your SMSF has been wound up.

4. Keeping the fund’s tax concessions

If you wish to have the fund continue to receive tax concessions for contributions, investment income and paying lump sums or pensions, do you have a plan to ensure the following?

You regularly review your fund’s investment strategy

Don’t forget to review your fund’s investment strategy at least annually.

All fund money and assets are held separately from money and assets held personally by trustees or directors or by a related employer

If you mix up your fund’s cash and investments with your personal bank accounts and investments it not only makes it very hard to work out the member’s benefits but it’s a breach of the superannuation laws.

All fund investments comply with the super laws

While the super laws allow your fund to invest in a wide range of investments don’t forget that there are many rules in place to ensure you maintain your SMSF to provide benefits for members and dependants. If your SMSF makes loans to member, invests or lends too much to anyone who has a relationship with the fund, for example, you or your SMSF could be penalised for any breaches.

All contributions received by the fund are allowed under the super laws

If your SMSF is to accept contributions from employers, members or anyone else make sure the fund can accept the contributions as permitted under the super laws. These rules are simple to understand, however, once a member of your SMSF reaches 65 there may be limits on the types of contributions that can be made to the fund.

All benefit payments made by the fund have been made in accordance with the super laws

If you are going to make a payment from your SMSF as a lump sum or pension, make sure the payment is made if a condition of release has been met. This permits the payment of benefits in many circumstances which relate to whether the member has retired, is 65 or older or may be invalided. It also includes the payment of death benefits to your dependants on your death or paid as provided in your last will and testament.

Proper and accurate records have been maintained as required

Keeping proper records can help you when it is time to prepare the fund’s accounts, calculating member’s account balances or when it’s time to pay benefits to members, dependants or to your estate. You may have delegated this responsibility to other professionals who can advise you on the types of information they’ll require to prepare your SMSF’s accounts.

5. Paying pensions

If your fund is paying pensions or about to start paying pensions, did you consider doing the following?

Get advice from an SMSF professional

An SMSF professional will be able to provide you with strategies that ensure pensions are paid as required by the super laws and tax is managed in the best possible way.

Check your SMSF trust deed to make sure it allows payment of the income streams

Your SMSF’s trust deed and other governing rules is important as it provides information on the responsibilities of trustees and members. Before you commence paying pensions to members make sure they are paid as authorised by the trust deed. There are many stories in the courts where the payment was not correctly authorised.

Confirm the member qualified for payment of the pension

Prior to paying a pension to a member or dependant from the fund make sure they are entitled to receive the benefit by meeting a condition of release.

Obtain an actuarial certificate if required

In some situations where your fund is paying a pension you may require an actuarial certificate which will tell you how much of the fund’s income is taxable and tax exempt. Your accountant, tax agent or superannuation fund administrator can help you.

Value the assets that support the income stream at market value

If you commence a pension or pay a lump sum from the fund a member’s balance should be valued on the market value of the fund’s investments.

Determine the minimum annual payment required under super law (and the maximum annual amount for a transition to retirement income stream)

Making sure that you pay the minimum pension from your fund is important as it will allow any income earned by your SMSF on your pension account balance to be tax exempt. If your SMSF is paying transition to retirement pensions to members make sure you limit the payments within the minimum and maximum limits if it is not in retirement phase.

Register for PAYG withholding if required

Sometimes pensions and lump sums paid from your SMSF may be taxable, especially if you are under 60 or where death benefits are paid to your adult children. If that’s the case, then the fund may need to be registered for PAYG purposes and tax withheld. Your accountant, tax agent or fund administrator can help you with registration and the amount of tax to be paid.

Determine your event-based reporting timeframe if required

When you commence a pension from your SMSF or convert (commute) the pension to a lump sum withdrawal your SMSF is required to report the amount to the ATO. Reporting dates depend on the total amount you have in super and your accountant, tax agent or fund administrator can help you there.

6. Setting an exit strategy

You may not think it, but even when you start your SMSF you need to include an exit strategy plan just in case something unexpected happens to you or another fund member.

Your plan may include:

  • Checking the trust deed for information on winding up the fund
  • Paying out or rolling over all your super benefits (leaving enough to pay final tax or expenses if required)
  • Appointing an approved SMSF auditor to complete the final audit
  • Completing and lodged the final SMSF annual return (including wind up details)
  • Lodging your transfer balance account report if required
  • Paying any outstanding tax, or
  • Closing the fund’s bank account after the ATO confirms the fund’s ABN is cancelled.

There are many aspects to making sure your SMSF runs like a well-oiled machine, but the main thing is keeping your super in the best condition possible so it can look after you in retirement.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is for general information purposes only and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

 

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5 Comments

Tony G

September 15, 2019

Hi Graham, you miss my point which is inside a superfund in pension phase there is no tax payable, so, if I am lucky enough to win $10,000,000 and I invest it in AFI (Australia Foundation) which pays dividend of 3.82% fully franked, then my annual income would be $545714 grossed up, & tax payable + Medicare would leave me $316,132 net. Inside my SMSF in pension mode I would pay no tax leaving me with $545714 after franking credits have been refunded. Very hypothetical I know but if I intend to play the lottery regardless, it would be better to play it in my SMSF provided such a speculative "investment" were allowed. Maybe this is how Bill Shorten's franking credit refund figures came about?

Tony G

September 14, 2019

I don't know it this is the appropriate forum but I was thinking, I have an SMSF and I also buy lottery tickets. I was wondering if I use my SMSF to buy the tickets (speculative investment?) and the ticket is a big winner, then the prize goes to my SMSF and when I declare retirement, any earnings made with the winnings are tax free. Maybe this is a good strategy compared to buying the tickets in my own name then having to pay tax on earnings derived from the winnings? I know winning the lottery is a very long shot, but I intend to keep buying tickets regardless. Say I win 150 million in Powerball next week, then I could save a heap of tax by playing the lottery in my SMSF?

Graham Hand

September 14, 2019

Unlike in the US, there is no tax in Australia on lottery winnings. So save yourself a lot of trouble and leave your SMSF out of it.

Vicki C

September 15, 2019

But it would get around the contribution rules, and get the $150m into that lovely low-tax regime?

Jenn

September 13, 2019

Thanks, Graeme. Looks like I've got a bit of work to do.


 

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