FAQ

A superannuation fund is a self-managed superannuation fund (SMSF) if it meets the following conditions:

• Has less than 5 members;
• Each individual trustee of the fund is a fund member;
• Each member of the fund is a trustee;
• No member of the fund is an employee of another member of the fund, unless those members are related;
• No trustee of the fund receives any remuneration for his or her services as a trustee.

A SMSF can also have a company as a trustee (known as a corporate trustee) if:

• Each director of the company is a member of the fund;
• Each member of the fund is a director of the company; and
• The fund has less than 5 members, no member is an employee of another member (unless related) and the trustee does not receive remuneration for their services as a trustee.

The requirement that all members be trustees ensures that each member is fully involved and has the opportunity to participate in the decision-making processes of the fund. This promotes true self-management. The Australian Taxation Office (ATO) will regulate funds that meet the definition of SMSF. Special rules apply to single member funds, members who are minors and funds when a member has died.

The definition of a SMSF requires that trustees cannot be remunerated for their services as a trustee. That is, trustees cannot be paid any amount for carrying out normal activities of a trustee (eg: participating in trustee decision making, attending meetings etc).

Trustees can however be reimbursed by the fund for costs incurred on behalf of the fund.

If a fund no longer meets the definition of a SMSF, it will remain a SMSF until the earlier of:

• The appointment of an approved trustee; or
• 6 months from the event that caused the fund to fail the definition.

This 6 months allows the fund time to restructure (for example, by transferring the member/s out of the fund) if it wishes to remain within the SMSF definition. However, this extension does not apply if the reason for ceasing to be a SMSF is the admission of one or more new members.

Some of the advantages people see in running their own superannuation fund are:

• They can have greater investment freedom;
• They feel the monies are safer being invested by them as trustees;
• They can actively participate in the management of the fund;
• There are reduced formal reporting requirements; and
Often more flexible retirement planning and estate planning options available.

However, setting up a SMSF is not for everyone. It does require at least a basic knowledge of the legislation that they as Trustees must comply with and the use of an experienced superannuation adviser.

Trustees of SMSF's are the ones who are ultimately responsible for the running of their fund. It is imperative that each trustee understands the duties, responsibilities and obligations of being a trustee. Rules exist to ensure the protection of the assets in the fund until they are needed at retirement. There are significant penalties imposed on trustees who fail to perform their duties.

A trustee of a SMSF must act in accordance with:

• The clauses of the superannuation fund trust deed;
• The provisions of the Superannuation Industry (Supervision) Act 1993 (SIS); and
• Other general rules, for example those imposed under tax law and trust law.

The SIS Act contains covenants or rules that impose certain requirements on trustees and are deemed to be included in the trust deed of every regulated fund. These covenants set out the duties imposed on a trustee under trust law in general. They require trustees to:

• Act honestly in all matters;
• Exercise the same degree of care, skill and diligence as an ordinary prudent person;
• Act in the best interest of the fund members;
• Keep the assets of the fund separate from other assets (e.g. the trustee’s personal assets);
• Retain control over the fund;
• Develop and implement an investment strategy;
• Allow members access to certain information.

Whilst trustees are not prevented from engaging or authorising other persons to do certain acts or things on their behalf (e.g. engaging the services of an investment adviser), they are bound to retain control over the fund. Ultimate responsibility and accountability for running the fund in a prudent manner lies with the trustees.

Trustees of SMSFs must keep money and other assets of the superannuation fund separate from their own personal assets. Similarly, the assets of the superannuation fund must also be kept separate from those belonging to a business (e.g. a business run by two partners who decide to set up a SMSF).

Money belonging to the fund must not, under any circumstance, be used for personal or business purposes. This money is for retirement purposes and generally cannot be accessed until retirement. The fund’s assets must not be viewed as a form of credit or emergency reserve when faced with a sudden need.

It is the trustee’s responsibility to ensure that a SMSF is operated for the sole purpose of providing retirement benefits for members or member’s dependants.

The Core purpose of superannuation is to supply benefits to a member when the following events occur:

• On or after retirement from gainful employment, or
• Attaining a prescribed age, and
• On the member’s death.

The Ancillary purposes cover the provision of benefits for members in the following circumstances:

• Termination of the member’s employment with an employer who, at any time, had made contributions to the fund for that member;
• Cessation of employment due to ill-health (whether physical or mental);
• Death of the member after retirement where the benefits are paid to the member’s dependants or legal representative or both;
• Death of the member after attaining the age of 65 where the benefits are paid to the member’s dependants or legal representative or both;
• Other ancillary purposes approved in writing by the Australian Prudential Regulation Authority.

This last ancillary purpose allows a fund to provide benefits in situations of financial hardship and / or on compassionate grounds.

One of the main ways to determine if a fund has breached the sole purpose test is to examine the character and purpose of the fund’s investments. One example is where the investment arrangement indicates that the purpose of the fund is to provide financial assistance to another party who is not a member or beneficiary of the fund itself.

Another indication that a breach of the sole purpose test may have occurred is when a fund is ‘running a business’ as part of its investment strategy. Our experience is that where a large proportion of fund assets are used to conduct a business within a SMSF, there is a real risk that the trustees of the fund may lose sight of their obligation to comply with the sole purpose test (and/or other provisions of SIS) at all times. This is because other purposes may come to the fore in operating the business.

Trustees who breach the sole purpose test face civil and criminal penalties. A breach of the sole purpose test is the most serious breach. It can result in a fine of up to $220 000 on individual trustees and 5 years imprisonment. Higher penalties apply to corporate trustees.

In making investment decisions the trustees must act in accordance with the funds trust deed, investment strategy and the provisions of SIS. Some of the more important issues to consider when investing a SMSF’s assets include:

Under SIS all SMSFs are required to have an investment strategy. The trustees are responsible for formulating an appropriate investment strategy and it is strongly recommended that the strategy be in writing. All investments must be made in accordance with the investment strategy of the fund.

SIS sets out various rules and restrictions on investments. These include:

• Lending to members and their relatives.
• Acquisition of assets from ‘related parties’ of the fund.
• Borrowing by superannuation funds.
• In-house assets.
• Investments must be made and maintained on an ‘arms length’ basis.

These rules are quite complex and professional advice should be sought if a Trustee is uncertain as to the legality of a proposed investment transaction.

Other than the rules discussed above, superannuation funds can generally invest in:

• Shares (domestic and international).
• Managed funds.
• Property (domestic and commercial).
• Certain related unit trusts.

Super Matters provides specialist superannuation services, including fund administration - structuring advice on issues such as pension payments and asset allocation.

Should you have any questions on Self-Managed Superannuation, please do not hesitate to contact us.