There are a lot of rules and regulations when it comes to superannuation and running your SMSF. Fund investments are for the sole purpose of providing benefits for the members or their dependants for superannuation purposes and not for personal reasons. Here are some common mistakes and how you can avoid them.
1. Don’t use your SMSF money for personal reasons
Some people take money from their SMSF accounts and pay personal or business expenses to help themselves or a close friend or relative. Sometimes they do so inadvertently, and in other cases, they do not realise it is not allowed.
It is essential that everyone separates their personal and business bank accounts from their SMSF accounts. Taking money from superannuation before the correct time can result in severe penalties to the fund as well as the member. If an amount is withdrawn in breach of the rules, it should be repaid as soon as possible. Frequent breaches may result in a person being disqualified from running an SMSF and include financial penalties.
2. Investments not in the fund’s name
Make sure SMSF investments are not mixed with personal investments. A requirement of superannuation law is that the assets of a fund must be in the name of the individual trustees or the corporate trustee. If this is not possible, supporting documentation that demonstrates the asset belongs to the fund, such as declarations of trust or trustee minutes, should be maintained. If a member becomes bankrupt, investments in the name of the fund are protected from the member’s creditors in most cases. Being well organised will ensure the investments are in the right name.
3. Stick to the investment rules
It is possible for an SMSF to invest in a wide range of investments including term deposits, shares, property and cash.
However, it is essential to make sure the fund obeys the many rules applying to investments. Most of these rules apply where a person, company or trust has a significant link with the fund. This includes members, trustees, any of their relatives and companies or trusts they control. If the fund makes a loan, invests in or leases assets to a related party, penalties may apply, and the fund could lose its tax concessions.
Any assets or money belonging to the fund must not be used for personal or business purposes unless it is specifically allowed by the superannuation law. For example, it is possible for the fund to lease commercial property to related parties providing it is on a commercial basis and permitted by the fund’s investment strategy. The money in the fund is never to be used as a source of cheap finance and cannot be used for emergencies.
Complying with the investment rules requires some planning and monitoring of the SMSF on an ongoing basis, especially when the values of investments change or related parties are involved.
4. Pay at least the minimum pension
The minimum amount of pension must be paid or there can be problems for anyone in retirement phase or receiving a transition-to-retirement pension. It can mean unnecessary tax in the fund and compliance issues. One of the benefits of superannuation is access to tax concessions so why not maximise that opportunity.
Strict rules apply to pensions, when income earned on assets that support retirement phase pensions is tax-free. Not maintaining pensions properly may result in the loss of benefits and then paying tax on those earnings within the fund.
Sometimes unexpected errors can occur, resulting in small underpayments of the pension. It is possible to make a catch-up payment to get things back on track and not impact on tax concessions. Prevention is better than cure and arrangements should be made to ensure the minimum amount will be paid automatically before 30 June.
5. Store documents properly
Keeping the documents of the fund such as the trust deed, minutes of meetings and decisions, investment information, membership and trustee acceptances is essential for compliance, audit and when the trustees of the fund may be brought to account. Loss of any documents may result in an unsatisfactory outcome as disputes may arise between the trustees, members and others making a claim on a fund benefit.
Records that are required to be kept for five years are:
- accounting records that provide accurate information about the transactions and financial position of the fund
- the annual operating statements and the annual statements of the fund’s financial position
- copies of all SMSF annual returns lodged with the ATO
- copies of any other statements lodged with the ATO or provided to other super funds
Records that are required to be kept for 10 years are:
- trustee minutes of meetings and decisions on matters affecting the fund
- records of changes to trustees, and a member’s written consent to be appointed as a trustee
- trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee, appointed after 30 June 2007
- copies of all reports given to members
- documented decisions about storage of collectibles and personal use assets
Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is for general information only and does not consider any individual’s investment objectives.
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