New SMSF Rules Should Trigger Review Of Trustee Duties

According to the Australian Taxation Office’s statistics, there are just under 600,000 self-managed superannuation funds in Australia. So what is an SMSF and what are the rules in establishing and managing an SMSF?

An SMSF is a small superannuation fund set up and run by ­people who are also its members. An SMSF can only have up to four members. An SMSF allows people to take control of their own retirement savings as members can choose what they want to invest in as well as control the fund’s ­expenses. However, having this control comes with big responsibilities: whether a member is an ­individual trustee or a director of the SMSF’s corporate trustee. Since SMSFs are regulated by the ATO trustees must carry out their responsibilities diligently or risk ATO compliance action.

An SMSF trustee, first and foremost, must comply with the rules of their SMSF’s trust deed. A trust deed is a document that sets out the rules that govern the ­effective functioning of the SMSF. If a trustee fails to obey their SMSF’s trust deed, other members of the SMSF have every right to take legal action against them!

Trustees must also comply with the taxation and superannuation laws. Failure to comply means risking their SMSF becoming a non-complying superannuation fund and losing its taxation concessions. Trustees can also face individual penalties. Depending on how serious the noncompliance is, trustees could be: disqualified, removed or suspended; subjected to civil and criminal prosecution; and risk ­financial penalties.

The superannuation law requires that an SMSF trustee must act honestly; exercise care, skill and diligence in managing their SMSF; act in the best interest of all SMSF beneficiaries; keep the money and assets of the SMSF separate from the assets they own personally; and, retain control over the SMSF and allow members access to information about the SMSF.

The purpose of superannuation is to provide death or retirement benefits for the members or the members’ dependants. This also applies to SMSFs.

Therefore, an SMSF trustee must develop, implement and regularly review an investment strategy (including life insurance offerings) for their SMSF; ­determine members’ eligibility to make contributions into their SMSF; understand the rules in paying superannuation benefits; and, ensure members do not ­access their superannuation ­savings if they are not legally entitled to do so.

Of course, money belonging to an SMSF cannot be used for personal or business purposes under any circumstances and it cannot be treated as an “emergency fund” when members face financial ­difficulties. Yet we know from the courts it is a regular occurrence: this is one of the biggest pitfalls of SMSFs — the temptation to ­access money when times are tough.

Managing an SMSF involves various administrative responsibilities and annual obligations. This includes keeping accurate tax and superannuation records; ­arranging an annual tax return for the SMSF; arranging valuations of the SMSF’s assets; and, notifying the ATO if there are any changes in the SMSF’s details. Trustees must organise annual audits of the SMSF by appointing an independent and approved SMSF auditor before lodging the SMSF’s annual tax return.

As you can see, operating an SMSF involves much more work than just opening up a bank account. There can be consequences if you do disobey the relevant laws.

To maintain an SMSF successfully, you must have a good understanding of the trustee role as well as have the time and skills to ­manage your SMSF. Although a trustee can appoint other people, such as an accountant, fund ­administrator, or financial planner, to help manage the SMSF, the obligations ultimately fall on the trustee.

It is the trustee who has the responsibility and accountability for running the SMSF in a compliant, prudent, and honest manner. To be an effective trustee, you must be able to clearly make the distinction between yourself as a trustee of the SMSF, and as a member and beneficiary of the SMSF. Sometimes these roles might conflict so you must ensure you are wearing the “right hat” before taking any action.

Monica Rule

The Australian

4 July 2017

Recent Posts

See All

ASIC Should Withdraw Its SMSF Factsheet

The Australian Securities and Investments Commission (ASIC) should withdraw its Self-Managed Superannuation Fund (SMSF) factsheet because it contains “an array of seemingly deliberate inaccuracies”, a

SMSFA Points To ASIC Fact Sheet Inconsistencies

The SMSF Association has criticised the corporate regulator’s focus on the risks of SMSFs in its mailout campaign targeting new trustees, saying the data sources used in its fact sheet are inconsisten