Have you checked the health of your SMSF lately?

20 Jun 2013

By Andrew Pidgeon

In the lead up to 30 June, there is no better time to run a quick health check over your self managed super fund (SMSF) to ensure that all is in order should the Australian Tax Office (ATO) come knocking. The ATO has been steadily increasing their program to audit SMSFs, and, depending on the breach, the penalties of breaking the law can be significant.

The purpose of this article is not to strike fear into the hearts of trustees about the complexity of running an SMSF, but to remind trustees of their ongoing responsibilities and the requirements that must be met in order to comply with the rules.

Whilst the following list is not exhaustive, it does provide some guidance about the points to consider for your SMSF to ensure that it will pass an ATO audit. Of course, where you appoint a professional service to administer the fund these issues are normally considered in conjunction with the service provider on a regular basis.

1. Trust Deed

An SMSF must have a trust deed, which encompasses the governing rules for the fund. All actions by the Trustees must be permitted within the trust deed to avoid a breach. In the past decade there have been four major legislative changes that have affected SMSFs. With rules changing on a regular basis, Trustees should regularly review their trust deed to ensure it complies with the legislation, and that the actions taken by the Trustees are permitted within the deed. A regular deed update service is one way to ensure that at all times the deed reflects the current rules and regulations.

2. Investment strategy

Is often a forgotten document, but something that an SMSF must be maintained and be reflective of the positioning of the portfolio at all times. Whilst most investment strategies are fairly general and provide wide scope for Trustees to position the assets of the portfolio, this does not mean that this document can be overlooked. Failure to update the investment strategy prior to purchasing an investment property for example, could result in a breach of the rules where the investment strategy does not allow for real property to be held in the fund. Clearly where the Trustees chooses to invest in more exotic assets such as gold, a general investment strategy is unlikely to accommodate such an asset and therefore would need to be customised.

On this note, having a disciplined approach to the fund's investment strategy and asset allocation is probably the single most important consideration for Trustees. Getting caught up in the latest wave on the market can lead to significant erosion of capital when the 'bubble bursts.'

3. Liquidity

Trustees have a responsibility to ensure that the fund can meet its obligations at all times whether it be fund expenses such as accounting fees, the SMSF levy or pension drawings. Occasionally I see an SMSF that has a large illiquid asset such as an investment property with limited funds held in cash, where the members are drawing pensions. At some point the Trustees may be forced to sell the property at a 'fire sale' price below the property's true market value in order to meet its obligations.

4. Insurance

Trustees have a responsibility to consider the insurance requirements of members as part of their investment strategy. Failure to do so can result in a breach of the rules.

Some important considerations in relation to insurance include:

  • The type of cover offered for example death, TPD and income protection. Remember that there are significant implications in incorrectly structuring personal insurances within the superannuation environment. Implications can include unwanted tax consequences or having the proceeds of the life insurance policy locked up within the superannuation environment until the member reaches preservation age which could be some time off, when the need for the funds is now.
  • New products available in the marketplace have cleverly offered a solution to preservation issues which can arise from holding TPD and income protection cover in superannuation. This arises when the contract is structured so as to split the ownership between the life insured and the Trustees of the SMSF to achieve the optimum outcome in all cases, while allowing the majority of the premium to be funded from the SMSF, which is a 'having your cake and eating it too' outcome.
  • The sum insured. Whilst more is always better than less when it comes to determining an appropriate level of insurance, the cover is not free of cost. A carefully thought out needs analysis is important to ensure that the life insurance budget is spent in the right areas and prioritised where the needs lie.
  • A consideration of costs. Member contributions can be eroded by fees and insurance premiums if not tailored to the members needs, leaving little left to accumulate for retirement. Getting the balance right is an ongoing consideration, particularly in the current environment where contribution limits are highly restrictive.

5. Maintaining proper records and documentation

It is the Trustee's responsibility to ensure that documents are kept to record their actions and that minutes are prepared to document significant action and changes to the Fund. Failure to maintain proper records can result in significant penalties to the Trustees.

6. Ongoing accounting requirements

It is a Trustee's responsibility to have financial accounts prepared each year, have these accounts audited and a tax return lodged with the ATO. In recognition of the complexity of this area, the requirements for auditors have been stepped up considerably in recent years to ensure that the auditor is properly fulfilling their role of assessing the compliance, or lack thereof, of the fund. From my reading it is clear that where a Trustee becomes aware of a breach and the breach is reported to the ATO (often through the audit process) and the Trustees acts quickly to rectify the problem, the ATO is likely to be more lenient in their response – although there are some areas where the ATO does not have discretion in applying penalties. In contrast, where a breach is significant, the conduct misleading or deceptive, or where there is a pattern of repeated breaches, the consequences can be severe.

7. Registration of assets

Often Trustee's might think an asset is held inside their SMSF, but in reality the documentation might not reflect this. Assets need to be held in the name of the Trustee's of the fund, in trust for the Fund. Property in particular can be tricky, where in WA the titles office does not allow the designation to show the asset being in trust for the SMSF. Instead, the title must show the Trustees as the owner of the property, with a Deed of Trust drawn up by a lawyer to tie the ownership back to the SMSF. While this might seem fussy, in fact similar rules apply for chess sponsorship of ASX listed shares. So it is important that you get registration of assets right.

8. Minimum pensions

Where a member is in pension phase the Trustees have a responsibility to pay at least the minimum pension for the member each financial year, and below the maximum pension where this applies. While the rules have been relaxed recently, failure to meet the requirements could result in the ATO ruling that the member was not in pension phase during the year which will have negative tax implications, and could in fact be disastrous where a large capital gain was realised during the period.

9. Beneficiary nominations

Estate planning can be a complicated area, and the implications of getting these strategies wrong can be unthinkable. Trustees and members should prepare and review beneficiary nominations regularly to ensure that remain current both in terms of the member's wishes and the rules of the day. Nominations can be in the form of a binding, non-binding or automatic reversion where the member is in pension phase. Different circumstances warrant a different approach to these strategies, which should always be considered in the context of your wider estate planning strategies and will.

Remember that superannuation is a non-estate asset, hence it does not automatically pass through your estate to be dealt with by your will. This is a specialist area that I can easily spend an hour discussing with a client in terms of the options, the implications and the strategies designed to achieve the desired outcome of avoiding burdening loved ones with a complicated mess and minimising unnecessary tax.

Carefully structured estate plans will these days leave a clear action map for solicitors and executors to remove decision making and discretion and achieve the optimum outcome for the beneficiaries.

As stated previously, the above is not by any means a complete list of all the issues for a Trustee to consider, but is rather designed to prompt Trustees to check some of the issues.

Appointing a professional service provider who specialises in this area should help ensure that you have all the ducks in a row should the ATO start asking questions. And with rules changing frequently, and the legislation sitting behind the superannuation rules spanning thousands of pages, being a Trustee is a role that should not be taken lightly.

To learn more about Andrew, view his online profile.

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