There’s lots of rules and regulations when it comes to superannuation and running your SMSF. Here’s some common mistakes and how you can avoid them.
1. Don’t use your SMSF money for personal reasons
One major mistake with an SMSF is for members to take money out of the fund for personal or business needs.
“People take the money from their SMSF accounts and pay personal or business expenses to help themselves or a close friend or relative. Often, they will not be aware they’re taking the money out of their SMSF”, says Graeme Colley Executive Manager Technical and Private Wealth with SuperConcepts.
“It’s essential to separate personal and business bank accounts from the SMSF’s accounts. Taking money from superannuation before the correct time can result in severe penalties to the fund as well as members. If an amount is withdrawn in breach of the rules it should be repaid as soon as possible. Frequent breaches may result in financial penalties and trustees could be disqualified from running an SMSF.” he says.
2. Investments not in the fund’s name
Having investments that belong to the fund in another name can lead to problems and it’s an easy mistake to avoid.
“Make sure SMSF investments don’t get mixed up with personal investments. The superannuation law requires assets of a fund to be in the name of the individual trustees or the corporate trustee. Where this is not possible supporting documentation demonstrating 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,” Colley says.
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”, says Colley.
However, it is essential to make sure the SMSF 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.
Do not use fund assets or money 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. Fund investments are for the sole purpose of providing benefits for the member or their dependants for superannuation purposes and not for personal reasons.
“Complying with the investment rules requires some planning and monitoring of the SMSF on an ongoing basis. When the values of investments change, or related parties are involved, the trustees need to make sure the fund does not run into trouble with the superannuation investment rules.” he says.
4. Ensure you pay at least the minimum pension
Pay at least the minimum amount of pension otherwise there can be problems for anyone in retirement phase or receiving a transition to retirement pension. Colley says that, “failure to pay at least the minimum 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 when it is available.”
“Strict rules apply to pensions and income earned on assets supporting pensions is tax-free in the retirement phase. 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. Keeping Documents
“Keeping fund documents such as the trust deeds, 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.” according to Graeme Colley.
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.
All SMSFs are required to keep some records for at least five years and other records for at least 10 years.
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, and
- the annual operating statements and the annual statements of the fund’s financial position.
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 the member’s written consent to be appointed as a trustee
- copies of annual returns lodged with the ATO, and
- copies of all reports given to members
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