5 warnings for trustees about SMSF compliance

Once the decision is made to set up an SMSF and the SMSF is properly set up, the trustees (individual or corporate) must be aware that is not the end of the game. They still need to keep observing the stringent superannuation and tax rules throughout the SMSF's lifetime; otherwise tax benefits will be lost and the fund will be taxed at 45% - not to mention facing harsh penalties.

Without being exhaustive, this article will provide you with some key tips to avoid compliance pitfalls. [1]

 

In-house asset restriction

If your SMSF lends to SMSF members (or their relatives), watch out for the 5% in-house asset limit. By law, an SMSF is restricted to having no more than 5% of its total assets (by market value) invested in in-house assets such as loans to related parties.

Another typical in-house asset scenario is where the SMSF buys a holiday apartment and the property is held under the name of an individual who is related to one of the SMSF's members. If the property is purchased by the SMSF itself, it may not be an in-house asset but if, for example, the trustee uses it as his or her holiday accommodation, the trustee is gaining a personal advantage that breaches the golden rule of preserving the fund only for the retirement of its members (the sole purpose test).

Investment strategy

Trustees are not only compelled by law to prepare and implement an investment strategy, but to review regularly the strategy so it is up to date. In doing so, the trustees should consider whether to provide insurance for members (life and TPD cover) and make investment decisions based on the personal circumstances of the members. To avoid risk, diversification of investment into different asset classes (for example, shares, real property and fixed interest products) is desirable. All investment decisions should be fully documented.

Market value for assets

Trustees are required to value their assets at "market value" when preparing their financial statements. They need to support their valuation on objective evidence and data. This means that trustees are no longer allowed to use historical value for asset valuations for reporting purposes.

Approved SMSF auditors

SMSF trustees needs to appoint an approved SMSF auditor to audit the SMSF each year. The auditor must be registered with ASIC as an "approved SMSF auditor" and be appointed at least 45 days before the SMSF's annual return is due. The auditor must provide the audit report within 28 days of receiving all documents relevant to the preparation of the report.

Artwork and "collectables" investments

The SMSF trustee needs to be aware that they cannot use artworks and the jewellery acquired by the SMSF for their own benefit. For instance, the trustee cannot display an SMSF artwork at their home or wear the jewellery. To do so, it will mean that the trustee is gaining a private benefit (current day enjoyment) that contravenes the SMSF genuine retirement purposes (sole purpose test). Other restrictions in this regard are worth mentioning:

  • An SMSF trustee must maintain a record of his/her decisions in relation to why an artwork or collectable has been stored in a particular location. This document (it could be a minute of a meeting) must be kept for at least 10 years after the decision.
  • An SMSF trustee should be mindful not to enter into a lease agreement with a related party in relation to any of these items. An SMSF can lease artwork to an art gallery as long as the gallery is not owned by a related party and the lease is on arm's-length terms.
  • If an SMSF sells any of these items to a related party of the fund, the market price must be determined by a qualified independent valuer and the transaction must be made on arm's length terms.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of SMSF topics.

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[1] This information can be found in Checkpoint online products The Essential SMSF Guide and Australian Superannuation Handbook.