There are a lot of rules and regulations when it comes to superannuation and running an SMSF. Here are some commonly made mistakes and how they can be avoided.
1. Don’t use your SMSF money for personal reasons
A major mistake often made with SMSFs is for members to use their retirement savings for personal or business needs.
People may make the mistake of taking money from their SMSF accounts to pay personal or business expenses which help themselves or a close friend or relative. Sometimes they’ll do it as a genuine mistake, without realising it's not allowed.
It’s essential that everyone separates their personal and business bank accounts from their SMSF’s bank accounts. Taking money from superannuation before it’s permitted can result in severe penalties for the fund, fund trustees, as well as members. If an amount is withdrawn that is in breach of the rules, it should be repaid as soon as it is discovered. Frequent breaches may result in financial penalties being imposed or the trustee being disqualified from running an SMSF.
2. Investments not in the fund’s name
Having investments that really belong to the fund in a name other than all the fund trustees can lead to problems. The good news is that it can be easily avoided.
It is essential to make sure SMSF investments don’t get mixed up 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, must be maintained. If a member becomes bankrupt, investments in the name of the fund are protected from the member’s creditors in most cases. It’s important to be well organised to 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 adheres the many rules applying to investments. Most of these rules apply where a person, company or trust has a significant link with a fund. This includes members, trustees, any of their relatives, and companies or trusts they may 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 should never 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.
4. Ensure the SMSF pays at least the minimum pension
It is important that the SMSF is instructed to pay at least the minimum amount of pension otherwise there can be problems for any members in retirement phase or in receiving a transition to retirement pension. Failure to pay at least the minimum could result in unnecessary tax in the fund and compliance issues. One of the benefits of superannuation is the access to tax concessions, so why not maximise the opportunity when it’s available.
Strict rules apply to pensions, and income earned on assets that support retirement phase pensions is tax-free. If an SMSF is not maintaining pensions properly, it 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 out of the fund automatically before 30 June.
5. Keep the fund’s documents
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.
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;
- the annual operating statements and the annual statements of the fund’s financial position;
- copies of all SMSF annual returns lodged with the ATO; and
- 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; and
- documented decisions about storage of collectables and personal use assets.
So that’s five important things to remember when running an SMSF. Most of these are just common sense and help ensure the compliance status of an SMSF. Remember there are other rules that also need to be understood and met, but by following these five rules the fund should be on the right track.
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