SMSF Benefits and Responsibilities
As you are probably already aware, participating in a Self-Managed Superannuation Fund (SMSF) holds many advantages and benefits for its members and trustees. This includes being able to set investment strategies, choose the selection of investments, decide when to enter and exit markets, borrow to invest, manage the accumulation and retirement phases of the fund, pro-actively manage member-oriented taxation, and significantly reduce administration costs.
However, the running of a self-managed super fund involves a lot of responsibility for the trustees. Some of the main responsibilities and challenges for SMSF trustees are the need to maintain not only investment knowledge, but also an understanding of the obligations and laws surrounding the governing of a SMSF.
There are a number of annual and on-going trustee obligations that need to be adhered to in order to avoid what can be significant fines and penalties. These obligations range from maintaining proper record keeping of all compliance and taxation documentation in accordance to SMSF laws, to ensuring the fund keeps its concessional and/or tax-exempt status.
Maintaining SMSF Compliance with external services
One of the core responsibilities of the Trustees is to ensure that the fund remains compliant and abides by the laws that govern the running and administration of a SMSF. Even though the responsibility for the administration and decision-making of the fund still resides with the Trustees, parts or all of the associated tasks can be delegated to external speciality service providers to ensure compliance is maintained.
For example, one of the obligatory SMSF tasks that does need to be delegated externally is the production of yearly audits conducted by an Approved SMSF Auditor. It is the responsibility of the Trustees to appoint an auditor each year, 45 days before the annual return due date.
Not abiding by the rules, regulations, and obligations can result in the fund becoming non-compliant, which carries substantial consequences for both the fund and the trustees. Specialist SMSF accountancy services are often engaged to assist the trustees in meeting their responsibilities and ensuring the fund remains compliant. These services can include market valuations of assets, preparation of accounts and financial statements, on-time lodgement of income tax, annual returns and member statements, pro-active financial advice, and suitable investment strategies.
What happens if your SMSF is deemed Non-Compliant?
The SMSF Trustees are legally responsible for the compliance of the fund to the super fund trust deed and the Superannuation Industry (Supervision) legislation. There are significant penalties associated with non-compliance for both the trustees and the fund.
If a fund is deemed non-compliant, it does not qualify for concessional tax rates and is instead taxed at the top marginal rate of 45%. This rate is applied not only on the income generated by the fund, but on the total assets of the fund (not including concessional contributions). The tax is also payable in the financial year of the non-compliance. The fund effectively loses almost half of its value for non-compliance.
The members found responsible for the breach in compliance will be disqualified and may not remain in the SMSF. They can also be fined personally and even face imprisonment.
These risks can be minimised through the appointment of a specialist SMSF company to handle the administration and assist you in developing a sound investment strategy that complies with the regulations.
Are my SMSF Assets and Investments compliant?
There are a number of rules and regulations surrounding assets and investments which must be adhered to as well, in order to ensure compliance. These include, but are not limited to, the Sole Purpose test, Contributions Caps, the Arm's Length rule, Separation of Assets and In-House Assets. Any breach of these can result in the fund being deemed non-compliant.
Some of the penalties can attract civil and criminal charges, so if you have any doubts it is worth seeking advice from accountants who specialise in SMSF compliance.
What property can my SMSF invest in?
The "Sole Purpose" legislation, like most rules, has some exclusions and one of these is business real estate (i.e. property "wholly and exclusively" used by a business), provided it does not contravene the arm's length rule. Breaching the arm's length or "in-house" assets rule can have dire consequences, so if there is any doubt, you should seek advice by SMSF professionals prior to any transaction.
Residential property investment is often a part of the SMSF investment portfolio, but there are major differences in the regulations between commercial and residential property. Trustees need to know these differences and ensure that they abide by the rules. Investment in residential property in a SMSF come with restrictions on acquisitions and use, even in the retirement phase. It is important to seek expert advice if you are not 100% sure that the proposed investment property is suitable for your SMSF.
What is the Transfer Balance Cap?
There are two distinct phases in superannuation; accumulation and retirement phase. In the past, you personally were either in one or the other. With recent changes to the superannuation laws, this is no longer the case. The introduction of a "Transfer Balance Cap" limits the amount that can be transferred into the retirement phase. This means that even in retirement you could still have savings in the accumulation phase. Any earnings on your investment in the retirement phase are of course tax exempt, but earnings in the accumulation phase will still be taxed at 15%.
This transfer balance cap applies retroactively to everyone, including those with a Self-Managed Super Fund and people in a defined benefit fund. As the difference in the treatment of some funds can be complex, it is advisable to talk about your individual situation with a financial advisor and SMSF expert.
Considering winding up your SMSF?
There are a number of reasons why you might consider winding up your self-managed super fund. Typically, the three main reasons are a significant change in circumstances, economic efficiencies, and non-compliance.
A significant change in circumstances can be that the SMSF is no longer a good fit with your personal circumstances. It might also be that an experienced trustee dies or retires from the fund, and the remaining members do not have the time, skill or interest to perform the duties and responsibilities now needed.
It might also be that the fund is no longer economically efficient; it is not as cost effective as it once was, the balance has dropped below a threshold, or the benefits do not outweigh the compliance requirements, in time and/or money.
The fund can also require winding up if it no longer satisfies the conditions of a Self-Managed Super Fund. This might be a voluntary winding up because compliance can not be maintained (i.e. moving overseas), or a request from the ATO that the fund be wound up because of a non-compliance breach.
Whatever your reasons for considering winding up your SMSF, it is advisable to speak with an experienced SMSF accountant to ascertain what the most appropriate actions are, whether the issues can be resolved or rectified, and what is the process going forward. It is important that any potential non-compliance issues are dealt with as soon as possible.
JSA Accounting SMSF Services
JSA Accounting offers speciality SMSF administration services that help Trustees meet their obligations and maintain compliance.
These services include SMSF administration tasks, asset valuation, audits, accounts and financial statements, lodgement of income tax, annual returns and member statements, winding up of funds, and investment advice and strategies (including property investment), that comply with the laws and regulations governing the funds.
At JSA Accounting, we take great pride in providing a comprehensive taxation, accounting and financial planning service in a personal and professional manner.
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