Key takeaways
- The ATO must be notified of changes to the SMSF.
- Disqualified people can’t be made trustees.
- Investment strategies must adhere to certain criteria.
- Failing the sole purpose test can come with tax consequences.
- Inaccurate records lead to financial and administrative consequences.
- Not having a separate bank account for an SMSF is illegal.
- SMSF assets cannot be used for personal use.
Failure to notify the ATO of SMSF changes
- A trustee or corporate trustee director joining or leaving the fund.
- The SMSF changes its contact details, such as:
- The nominated contact person.
- The fund’s phone number or email address.
- The registered address where fund notices are received.
- The SMSF’s status.
Nominating a disqualified person
Not everyone is permitted to become an SMSF trustee. The government is wary about allowing people who’ve demonstrated reckless or illegal financial behaviour to enter SMSF management. A disqualified person might be someone who:
- Has been convicted for dishonest conduct, such as theft or fraud.
- Has a civil penalty order to, for example, pay a fine.
- Is an undischarged bankrupt.
- Is disqualified by the ATO. The ATO may determine a person isn’t fit to be a trustee due to incompetence for the role or contraventions of superannuation laws.
Unsuitable investment strategy
The fund’s investment strategy has to adhere to certain criteria. There are various ways that a strategy won’t satisfy the ATO. For example:
- It doesn’t assess risk or understand the potential returns of SMSF assets.
- Fund assets aren’t adequately diversified.
- The strategy doesn’t have sufficient liquidity to meet the pension payments of individual trustees.
Failing to meet the sole purpose test
All SMSFs have a legal requirement to pass the sole purpose test. This test determines whether an SMSF’s assets are maintained for the sole purpose of providing retirement benefits to its members. There are different ways that a fund can fail the test, including:
- Purchasing commercial property from members or related parties at exorbitant prices.
- Allowing a member’s child to use a residential property held in the SMSF for personal use, free of charge or at a discounted rate.
- Selling a fund’s asset to a member at a discount.
An SMSF’s assets must be priced at market value. If a residential investment property is accepting tenants, the rent must be set at market rates. SMSFs must transact at arm’s length. This means that transactions mustn’t unduly benefit one party by not using the asset’s proper valuation. If a fund breaches this requirement, it’ll be taxed at the highest rate of 45% instead of 15%.
Not keeping accurate records
Funds have strict obligations around record-keeping and reporting. This includes every annual return and investment decision. Some records must be kept for at least five years. These include:
- Investment decisions and the fund’s financial position.
- Documentation authorising an early release of funds.
- Records of the type of benefit payment made to a member and the account it was drawn from.
Other documentation must be kept for at least ten years, including:
- The fund’s trust deed.
- Copies of reports provided to members.
- Signed trustee declarations.
Not separating SMSF assets from personal assets
SMSFs must be kept separate to personal accounts. The SMSF account is crucial for the fund’s core functions, such as:
- Managing the fund’s operations.
- Receive contributions and rollovers from members.
- Retain the proceeds of the fund’s investments.
- Pay the fund’s expenses and liabilities.
Not setting up an independent account for the SMSF is a breach of super laws. This is a common problem. In 2020, the ATO had to communicate with over 13,000 SMSFs, insisting that they update their account information to comply with regulations. Not doing so puts a fund’s assets at risk. Bankruptcies or divorce proceedings can lead to asset seizure. The SMSF will also not be able to accept rollovers from APRA-regulated funds.
Using SMSF assets for personal use
To reiterate, SMSF assets can only be used for the purpose of paying the retirement benefits of the members. This is a foundational principle of Australia’s superannuation scheme. It may surprise you how strict the ATO is about this.
Some funds invest in less traditional asset classes such as collectibles or artwork. This flexibility is one of the great things about an SMSF. However, it can get you into trouble. Let’s say your fund purchases a valuable piece of art. You then decide to hang the art in your house. You’ve breached the law.
From our clients
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Conclusion
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