There are a lot of rules and regulations when it comes to superannuation and running your SMSF. Here are some common mistakes and how you can avoid them.
One major mistake is that SMSF trustees and members use their retirement savings for personal or business reasons.
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.
It’s essential that everyone separates their personal and business bank accounts from their SMSF accounts. Taking money from superannuation before you are allowed can result in the fund being severely penalised as well as the member. Any amount withdrawn in breach of the rules should be repaid as soon as possible. Frequent breaches may result in being disqualified from running an SMSF and include financial penalties.
Having investments that belong to the fund in another that are not in the trustee’s name can lead to problems.
Make sure SMSF investments don’t get mixed up with personal investments. The superannuation law requires 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 should be maintained.
If a member becomes bankrupt, investments held 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 correct name.
SMSFs have the opportunity to invest in a wide range of investment types, including term deposits, shares, property and cash.
However, it is essential to ensure the SMSF obeys the many rules applying to super funds. 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.
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 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 dependents 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.
Pay at least the minimum pension amount; otherwise, there can be problems for anyone in the retirement phase or receiving a transition to a retirement pension. 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 tax concessions. Prevention is better than cure and arrangements should be made to ensure the minimum amount will be paid automatically before 30 June.
Keeping the documents of the fund, 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. Loss of any documents may result in an unsatisfactory outcome as disputes may arise between the trustees, members and others claiming a fund benefit.
All SMSFs are required to keep some records for at least five years and other documents for at least ten 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
• Copies of all SMSF annual returns lodged with the ATO
• Copies of any other statements lodged with the ATO or provided to other super funds.
Records that are required to be kept for ten 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
• 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 the storage of collectables and personal use assets.
These five common mistakes can be easy to avoid and will save the SMSF the embarrassment of being penalised for breaching the superannuation rules, which only reduces the amount you have left for retirement savings.
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