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What is an SMSF

3 Jul 2011 |

For a super fund to be classed as an SMSF it must meet the following conditions:

  • have no more than 4 members;
  • all members must be trustees as individuals or as directors of a trustee company;
  • no member can be an employee of another member, unless they are a relative of that member; and
  • trustees cannot be paid in cash or kind for any duties they perform as trustees.

To understand how an SMSF operates the following is an explanation of how the four main functions of the super fund are handled within an SMSF.

Compliance and accounting

The responsibility for this function in a SMSF is placed firmly on the shoulders of the trustees of the fund. For some people who have the skills and time they can perform most of the required tasks themselves. Others who either don’t have the skills, time or inclination can have this function done by their accountants or specialist SMSF service providers.

Administration

This is the function of a superannuation fund where an SMSF can really excel. This is because as long as the trustee members of an SMSF did not contravene any of the relevant laws and regulations, they can do almost anything whenever they want.

This is another case of where the duties and jobs associated with this function can either be performed totally by the trustees themselves or shared with a service provider or accountants.

Members of the other types of superannuation funds receiving sub-standard service, such as lengthy delays in requests being actioned, often just have to put up with it due to the level of bureaucracy associated with these funds.

If a member of an SMSF is on the receiving end of substandard service and, apart from going into the bathroom and yelling at themselves in the mirror, the responsibility is theirs.

Insurance cover

This function is one where most SMSFs are at a disadvantage. Large super funds can get access to group insurance cover that is a lot cheaper than can be obtained by individual members of an SMSF.

Where insurance cover is required, and insurance premiums for a SMSF are prohibitive, there is nothing stopping the members of the SMSF having a second superannuation account through either industry or commercial fund that they take out their insurance through.

Investment of the funds.

The type and number of investments that the trustee/members of an SMSF can have are only limited by the relevant rules and regulations. The almost unlimited choice can be a problem for the trustees of an SMSF. When the trustees understand the various investment rules and regulations, and when in doubt consult with their professional advisor, this should not be a problem.

The High Cost of Getting it Wrong with an SMSF

In all there are 7 rules that trustees of an SMSF must meet and are tested against. They are:

1    The sole purpose test.

  1. The need to have an investment strategy in writing.
  2. No loans or provision of financial assistance to members.
  3. In house assets cannot exceed 5% of market value of the fund.
  4. Inability to purchase assets from related parties except in limited cases.
  5. Investments need to be commercial and at arm’s length.
  6. Extremely limited borrowings allowed by super funds.

If an SMSF fails even one of these rules the tax office can seek the imposition of a number of penalties. Depending on the severity of the offence civil penalties of fines up to $220,000, or imprisonment for up to 5 years, can be imposed. The main punitive weapon in the tax office’s armoury, which it can impose without reference to a court of law, is the declaration that the super fund is a non-complying fund.

When a fund is classed as non-complying 46.5% of the fund’s assets can be taken in tax penalties and all future income of the fund is taxed at 46.5%. Given the severity of the penalties it does not make commercial sense for anyone to knowingly breach any of the rules.

For a greater understanding of the rules relating to SMSFs refer to Self Managed Super Funds – A Survival Guide, by Max Newnham.

 


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