In brief
- Every trustee is responsible for the fund following the law, even when others help run it.
- Your SMSF must have an investment strategy that covers risk and return, diversification, liquidity, paying benefits and insurance for members, and you must review it regularly.
- Each year an approved SMSF auditor, registered with ASIC and independent of whoever prepared the fund’s financial statements, must audit the fund before its annual return is lodged.
- With a corporate trustee, the fund’s assets stay in the company’s name when members join or leave.
The sole purpose test
An SMSF must be run for one purpose only: to provide retirement benefits to its members, or to their dependants if a member dies. This is the sole purpose test in section 62 of the Superannuation Industry (Supervision) Act 1993. Using fund assets for a benefit today breaks the test, for example living in a property the fund owns or hanging the fund’s artwork at home.
The ATO regulates SMSFs. If the rules are broken, it can fine trustees, disqualify them and, in serious cases, make the fund non-complying. A non-complying fund is taxed at 45% on the market value of its assets, less non-concessional contributions. Other rules every fund must follow:
- The fund can’t lend money to members or their relatives, or give them other financial help
- It generally can’t buy assets from related parties, except listed shares and business real property at market value, and in-house assets within a 5% limit
- All investments must be made and kept on an arm’s length basis, at market rates
- Business real property can be leased to a related party, such as the members’ own business, at a market rent and on arm’s length terms
Your investment strategy
Every SMSF must have an investment strategy, and the trustees must review it regularly and update it when needed. It should consider:
- the risk and likely return of the fund’s investments
- diversification, and the risks of holding most of the fund in one asset or type of asset
- liquidity: whether the fund can pay its expenses and members’ benefits when they are due
- whether to hold insurance, such as life or disability cover, for each member
If most of your fund is in one asset, such as a property, your investment strategy should show that you considered the risk and how the fund will still pay its costs and benefits.
Why the auditor must be independent
Every SMSF must be audited each year by an approved SMSF auditor registered with ASIC. The trustees must appoint the auditor at least 45 days before the annual return is due. The audit covers both the fund’s financial statements and whether it followed the super rules.
The auditor must be independent. SMSF auditors must meet the independence rules in APES 110, the code of ethics for professional accountants. In practice, an auditor can’t audit a fund if they or their firm prepared its financial statements. The only exception is work that was routine or mechanical, where any threats to independence are reduced to an acceptable level. ASIC acts against auditors who break this rule.
SMSF Genius audits funds online for accountants and trustees. Like every SMSF auditor, it must check for any relationship that could affect its independence before it accepts an audit, including with whoever prepared the fund’s accounts.
Individual trustees or a corporate trustee
An SMSF can have individual trustees or a company as its trustee. With individual trustees, each member must be a trustee. With a corporate trustee, each member must be a director of the company. Individual trustees cost less to set up. A corporate trustee costs more to set up and run, but it makes changes simpler and keeps penalties to one company:
| Feature | Corporate trustee | Individual trustees |
|---|---|---|
| Fund assets | Held in the company’s name, which doesn’t change when members join or leave | Held in the trustees’ names, which must be updated when the trustees change |
| Single-member fund | The member can be the company’s sole director | Two trustees: the member and one other person, who can’t be the member’s employer unless they’re relatives |
| Penalties | One penalty, on the company; its directors are jointly and severally liable to pay it | A separate penalty for each trustee |
| Cost | Company registration and yearly ASIC fees | Cheaper to set up |
The yearly compliance cycle
After each financial year ends on 30 June, the trustees gather bank statements, investment and property records, contribution details and the minutes of their decisions. The fund’s assets are valued at market value.
The fund’s accountant prepares the financial statements and member statements. The approved auditor then audits the fund. Only when the audit is complete can the trustees lodge the SMSF annual return with the ATO and pay the supervisory levy.
Trustees should also review the investment strategy, check members’ contributions against their caps, and keep the fund’s records for as long as the law requires.
What to do next
An SMSF gives you control over your retirement savings, and with it the trustee’s responsibility for following the rules every year.
SMSF Genius can audit your fund online. Whether an SMSF suits you, and how the fund should invest, is personal advice: for that, talk to a licensed financial adviser, such as Wealth Mantra’s.
