Wed 29 Aug, 2018
Did You Know About These SMSF Rules and Regulations?
If you’re considering commencing a self-managed superfund, you’re likely aware of the host of potential investment benefits. But what about the SMSF rules and regulations? Often the negatives of managing a self-managed super fund get clouded in conversation, and it’s not until you’re confronted by the ATO that you become aware of your obligations. In this blog post, we will explain the SMSF rules and regulations to should be aware of while managing an SMSF.
SMSF Rules and Regulations
Upon commencement of an SMSF, all members expose themselves to strict regulations around auditing. There are two audits that SMSF members should be aware of: an annual independent audit, and an ATO audit.
Annual Independent Audit
A financial and compliance audit must be completed by a registered SMSF auditor before a fund’s SMSF annual return can be lodged. This is required every year to ensure the health and integrity of your SMSF, and to ensure that your SMSF and investments are compliant with the relevant superannuation laws and the Superannuation Industry Supervision Act 1993. With a Squirrel SMSF, our team will organise this audit from an independent source, and is already included in our all-inclusive fixed monthly fee of $121 (inc GST). It is the trustees responsibility to ensure that this is completed each year, but don’t worry, Squirrel is here to help!
At any time in the lifetime of your SMSF, the ATO can invoke an audit on your SMSF. This audit is completed by the ATO, as opposed to an independent auditor. You may be required to complete this in your first week as an SMSF member. However, an ATO audit may not be required after 10 years of running an SMSF.
If your SMSF is set to be audited by the ATO, you and any other members will be contacted by an ATO case officer to access your ability to run an SMSF. If this happens, it is nothing to worry about! The experts at Squirrel can help you prepare for an ATO audit if it comes as a surprise, and this service is also includd in our all-inclusive fixed monthly fee.
The Sole Purpose Test
Probably the most important rule that prospective SMSF owners should be aware of is the sole purpose test. This is used to assess whether or not investments made within the SMSF are compliant. All investments must be made with the sole intention of growing the fund for the members’ future or current retirement. There can be no other direct or indirect benefit to any member or related party.
This test prohibits members from buying property they can live in, holiday in or lease out to members of their family. It also prevents the SMSF of investing in assets that may be used by a member or a related party. Sorry, cancel that classic car show you had booked in!
The SMSF is permitted to borrow funds in order to acquire new assets. This is done under a limited recourse borrowing arrangement – which basically protects the members from repossession of other assets in the fund in the event of default. It’s a pretty nifty protection, really.
The superfund can also borrow funds for up to 90 days to meet benefit payments due to members or to meet an outstanding surcharge liability, providing the total borrowed amount does not exceed 10% of the total fund value. In the event that a loan is required to cover the settlement of a security transaction, borrowing of funds is permitted by the ATO for a maximum of 7 days. The fund members must also be able to prove that the loan was not initially intended to be required at the time of entering into the transaction.
Always consult a qualified SMSF advisor before assuming that your SMSF is able to borrow funds.
Arms-length investments are those deemed by the ATO to be sufficiently unrelated to any member or trustee of the fund. Generally, this relates to the sole purpose test and means that members and other related parties can have no other interest in an asset other than through the SMSF investment. However, arms-length arrangements are particularly important if the SMSF intends to purchase commercial property from which your own personal business will operate. This is a strange loophole that is permitted, providing the business pays rent at an ‘arms-length’ arrangement.
There’s that word arms-length again! In short, this means the business must pay rent at the current market rate and behave as though they are operating a standard tenant-landlord relationship.
Carrying On a Business in an SMSF
SMSFs are not prohibited from carrying on a business, but the lines can get blurry with this restriction. It was previously thought that SMSFs couldn’t carry on a business as it would be in breach of the sole purpose test. However, the ATO now states that this is permitted, providing the business is allowed under the trust deed. A common complication for SMSF owners is the distinction between normal share trading for investment purposes, and the point at which the trading becomes of a business nature.
Nutty note – your fund’s trust deed is sort of like your rule book. It dictates what you can and can’t do, and is created upon commencement of the SMSF.
Having a qualified SMSF advisor and investment strategist to consult before making SMSF decisions is essential to be sure you are not breaching regulations and laws.
In Specie Transfers
In specie transfers involve a member transferring a privately-owned asset into the superfund. This is generally done for tax reasons, as the tax environment within an SMSF can be pretty rosy – particularly once you commence a pension. Under SMSF regulations, in-specie transfers are treated as contributions at their current market value. So beware of transferring high-value assets into the fund, as contribution caps may chew away at your expected tax benefits.
Once again, it’s important to consult a personal financial advisor first before assuming you can transfer a privately-owned asset into your superfund.
Acquiring Assets from Related Parties
Your SMSF can invest in assets from related parties providing that they are purchased at market value and are either a listed security, business real property or in certain circumstances, in-house assets. In-house assets are those that are in some way related to related parties under very specific criteria. These investments cannot account for any more than 5% of your total portfolio.
It’s important to remember that the ATO pays very close attention to SMSFs. Any errors or mistakes – whether intentional or otherwise – can subject you to heavy penalties. That’s why it’s important to be fully aware of all the SMSF rules and regulations before commencing one.
While we cannot provide personal financial advice at Squirrel, we do provide unlimited customer service. This includes annual compliance of your SMSF. It also includes answers to any questions you have about your SMSF, such as what your fund can and cannot do. And should you find your SMSF audited by the ATO, the Squirrel team will be with you every step of the way.
If you have further questions on SMSF rules and regulations, contact one of our Squirrel advisors. We’re nuts for SMSFs, so we’ll get you on the path to SMSF compliance in no time!