Preparing for the perfect SMSF compliance scorecard

Preparing for the perfect SMSF compliance scorecard
One of the benefits of using an SMSF as an investment structure is that an SMSF can offer greater control to trustee/members, but it’s also accompanied with many responsibilities. Here's how to achieve the perfect compliance scorecard so that the fund can comply with all the rules and regulations required.

Make sure the fund has been set up correctly
Having an SMSF established correctly provides members with access to the tax advantages associated with contributions, investment income and its benefits. It’s the foundation of success that the fund relies on.
Here’s a list that individuals should consider as part of the setup process of an SMSF:

• Determine who the members of the fund will be.
• Choose a trustee structure – either individual trustees or a corporate trustee.
• Choose and execute a suitable trust deed.
• Set up a bank account for the fund.
• Register the fund with the ATO.
• Obtain an electronic service address so the fund can receive employer contributions.

Managing the fund’s investment strategy
The fund must have an investment strategy stipulating its investment objectives, permissible investment categories and why that strategy has been adopted for the fund.

An investment strategy should be in writing, reviewed regularly and consider the personal circumstances of fund members, including their age and investment risk tolerance.

Here are some points a trustee should consider in developing and managing an investment strategy.

• Diversification – to what extent should the fund be diversified with regard to individual investments, as well as asset classes such as cash, shares and property.
• Liquidity – can the fund pay benefits to members and other expenses when required?
• Insurance – should policies be held for fund members?
• Ongoing relevance – does the SMSF continue to reflect its purpose and any changes in its members’ circumstances?

Managing the actual investments
Any SMSF, depending on its trust deed and investment strategy, may have a wide range of permissible investments, including public and private company shares, managed funds, private trusts, cash and term deposits, direct property, and even artworks and collectibles.

Where the investments are made at an arm’s length to third parties on commercial terms, there are few issues to be concerned about outside of the usual terms of the exchange of assets that need to be considered. However, with investments involving related parties, such as family companies or family unit trusts, restrictions may apply. As these rules can be complex, the guidance from an SMSF expert can be useful.

Points for trustees to consider when investing

• Ensure the investment is permissible in terms of the fund’s trust deed and investment strategy.
• Check whether there are any other restrictions or prohibitions with a proposed investment.
• Trustee should determine whether the investment has been made at an arm’s length commercial basis.
• If the investment involves related parties, does it meet the relevant regulatory provisions?
• Ensure copies of the documents and other records concerning the investments have been maintained, especially those involving related parties.

Managing contributions
Understanding the rules around contributions is important – particularly when they can and can’t be accepted by the trustee of the SMSF. The acceptance of contributions can depend on the member’s age, whether the contributions are personal or employer contributions, and whether members older than 67 years of age have met a work test. Here are some actions for a trustee to consider:

• Ensure contributions can be accepted by the fund dependant of their type, member’s age and work status.
• Check the information about the contribution been obtained to determine whether it is taxable and whether it should be included in the fund’s taxable income.
• Confirm an election has been received from a member concerning the tax deductibility of personal contributions.
• Determine which contributions have been counted against a member’s concessional and non-concessional contributions caps.

Paying an income stream

The main purpose of any superannuation account is the eventual payment of benefits.

Before paying a lump sum or pension, a member must have met a condition of release, such as retirement or reaching the age of 65 years old.

Before an income stream commences, calculations may be required which are based on the value of the member’s accumulation account and their age. Each year a minimum amount of the income stream is required to be paid. When commencing or paying an income stream from an SMSF, a trustee must make sure:

• The member’s account balance has been valued according to the ATO ‘market value’ guidelines.
• The minimum amount of the income stream for the year has been calculated.
• A maximum pension amount has been calculated in the case of a transition to retirement income stream.
• The income stream is being paid in accordance with the member’s instructions.
• The value of the income stream, at the time it commences or is commuted, is reported to the ATO for transfer balance cap purposes.

Meeting all reporting requirements    
It is the responsibility of trustees to ensure formal reporting requirements are met. This includes the fund’s income tax and regulatory returns, PAYG information and transfer balance cap information.

In fulfilling reporting requirements there is the need to appoint an auditor – and in some cases to engage an actuary to provide a certificate for tax and solvency purposes.

It is the responsibility of the fund’s trustee to complete the following:

• Arrange for the preparation of annual fund accounts. 
• Arrange for the preparation of the fund’s annual income tax and regulatory returns.
• Appoint an auditor to the fund.
• Obtain an actuarial certificate from a qualified actuary if the fund is required to use the proportional basis to calculate its taxable and tax-exempt income.
• Value the fund’s assets at its market value.
• Ensure that the minimum pension amounts have been paid to members.
• Report debits and credits to the ATO for transfer balance cap purposes.
• Notify the ATO of changes to the trustees or directors of the corporate trustee.
• Notify ASIC of changes to directors of the corporate trustee.
• Retain the fund records.

When the time comes: winding up a fund
There may come a time when a trustee will consider whether to wind up the fund. This could be due to a member’s death, loss of a member’s legal capacity, or simply that the fund has served its useful life and run out of money.

When winding up an SMSF, a trustee should consider the following:

• Read and understand the fund’s trust deed and other documents to see what’s required to wind up the fund.
• Ensure the fund’s income been accounted for and identify any expenses due for payment.
• Confirm benefits were paid to members or rolled over to a fund nominated by the member.
• Prepare the fund accounts, income tax and regulatory return, and ensure the associated audit functions are in place.
• Complete any outstanding expenses that are to be paid by the fund, such as income tax on the fund’s income.
• Check the fund’s bank account has been closed after all liabilities have been satisfied and income has been accounted for.
• Notify ASIC if the members decide to wind up a corporate trustee.

A set of simple checklists

Armed with these simple checklists, the trustee of an SMSF should be able to navigate the administration of their SMSF to ensure all things are in place at various stages of the life of an SMSF