Recently, the Australian Taxation Office (ATO) flagged its intention to increase audit action concerning self-managed superannuation funds (SMSFs), possibly leading to a number of trustees being penalised for failing to comply with the rules. Auditors themselves will also be under the magnifying glass.
Establishing an SMSF can seem like a quick answer to underperforming retail funds. However, the ATO crackdown will make investors increasingly aware of the high level of responsibility which comes with increased control.
Generally, all members of an SMSF are required to become trustees, which immediately makes them legally liable for the fund’s investment decisions and administration. However, many people do not realise the full extent of their responsibilities, as members of these funds, nor do they fully understand the rules.
From this year, auditors are required to sign off on whether the fund complies with the Sole Purpose Test, which states that the fund is being operated with the sole purpose of providing for retirement. This has implications for auditors and trustees alike.
From an auditor’s point of view, this means a focus on:
the trust deed which must outline the sole purpose of the fund as providing retirement benefits to members or to the dependants of a member in the case of a member’s death before retirement;
the investments to date and overall strategy, which must be in keeping with the sole purpose of the fund and must not indicate the fund is holding assets which are available for the private use of members;
benefit payments to determine that any preserved payments that have been made meet conditions of release.
Auditors are also required to notify trustees of any administrative or systemic weakness they identify, even if the fund complies with current law.
While the increased ATO activity may be primarily an education campaign designed to increase trustees’ awareness of their obligations, it serves to remind people that running their own super fund is a complex arrangement.
Trustees should pay attention to:
how various assets are acquired within the fund;
ensuring members do not benefit from the use of assets;
the purpose of the fund being solely to provide retirement benefits;
devising and executing an appropriate investment strategy; and
a high level of administration and record keeping.
Trustees must ensure their funds’ activities are in line with the trust deed.
They must review each investment decision and identify any incidental benefits which may arise, so they can be properly documented. For example, where a holiday home is acquired by a fund and rented on commercial terms to third parties, an incidental benefit arises when trustees are able to use this property on the same terms for a period each year. This requires careful scrutiny, as in most cases it could be an in-house asset.
In-house assets are another key area which trustees must focus on. An in-house asset is where an investment, whether direct or indirect, is made in a related party, including members, employers and associates. Exceptions to the rule include business real property and existing investments at 11/8/99 subject to transactional rules.
In-house assets cannot exceed five per cent of total assets and if this limit is breached, the trustees must put a plan in place to rectify the situation immediately.
If a fund fails to comply with the superannuation law, the penalties for trustees can be severe. The ATO can remove or suspend trustees from a fund, freeze assets of the fund, declare the fund to be non-complying for certain years of income, as well as prosecuting trustees under civil penalties provisions.
Overall, superannuation law is complex and it is imperative that members of an SMSF get professional advice about interpretation and application.
Barbie Chiro is the national tax partner atBKR Walker Wayland and member of theSmall Independent Superannuation FundsAssociation (SISFA) national technicalcommittee.
