Trustees are responsible for ensuring the fund is maintained for the sole purpose of providing benefits to the members upon their retirement, reaching of preservation age, or their beneficiaries if a member dies. The trustees are also required to ensure the fund is operated in accordance with the Superannuation Industry (Supervision) Act 1993 and other relevant legislation. Breaches occur when trustees do not comply with these rules, either accidentally or intentionally, resulting in the individual trustees, or directors of the corporate trustee to be personally liable to pay penalties. In the 2018 financial year, the tax office raised $1,743,003 in administrative penalties alone.
When completing the audit of a self-managed superannuation fund, some common errors made by trustees are:
#1 Loans to members
Members (and their relatives) are prohibited from borrowing funds from their SMSF, including short term loans. Doing so will result in a breach of the Superannuation rules and hefty penalties can apply.
This is the most common breach reported by auditors to the ATO each year.
Some loans can be made to certain related parties (such as a related private company) where a proper agreement is in place and the dealings are done on arm’s length terms. This is also subject to in-house asset rules and must not exceed more than 5% of the total assets of the fund. However, the ATO recommends being cautious when lending from your SMSF.
#2 Use of SMSF assets by members or associates
Assets acquired by an SMSF are not to be used by members or their associates. Two common errors made by trustees are:
Members and their associates are not permitted to live in the residential property held by the super fund, even if the rental income is at market value. Associates include (but are not limited to) spouses, parents, children, siblings, business partners and their spouse/children, and any companies or trusts controlled by any of those respective parties.
A related party is, however, able to occupy commercial premises, provided all dealings are at arm’s length.
Collectables (artworks, coins, jewellery)
Collectables must not be used for the personal enjoyment of fund members or their associates. They must be held separate, either at a storage facility (not within the member’s residence) or hired out to a third party generating market value income (i.e. income producing).
#3 Incorrect market value for assets
It is essential that assets are valued at market value. This is especially significant when a member is in pension phase, as the market value of the assets directly affects the minimum pension requirements for the following year.
Shares on the stock exchange and cash are easily valued, however other assets such as property and shares in unlisted companies may require assistance from a real estate agent or obtaining financial information such as financial statements.
#4 Not keeping accurate records and not for long enough
By law, trustees are required to keep proper and accurate superannuation records.
Records such as accounting records, financial statements and lodged tax returns must be kept for a minimum of 5 years. More permanent documentation, such as trustee minutes, records of trustee changes, consent to be appointed as trustee, and reports are given to members, need to be kept for a minimum of 10 years.
Records must be kept in writing and in English. Where electronic records are kept, these need to be verifiable by the ATO, if required.
#5 Assets not in line with the investment strategy
All investment decisions made by the fund must be in accordance with the investment strategy. As such, the investment strategy must be reviewed regularly to ensure investments are in line with the strategy. Where a new class of asset is purchased within the fund, such as international shares or a commercial property, and the strategy does not already allow for this, an update is required.
#6 Assets set up in the wrong name
All assets of the fund are required to be in the name of the fund. Regularly bank accounts and other assets, such as shares, are set up with the incorrect holding name, such as in the name of the individual members.
Where an asset is not held in the name of the fund, the trustees should rectify the documentation as soon as possible.
Other documentation that often has the incorrect name includes life insurance policies and invoices for property expenses.
#7 Out of date trust deed
Trustees are required to ensure the fund trust deed remains up to date and makes provisions for any changes in legislation. Due to the ever-changing nature of the superannuation laws, the deed should be reviewed and upgraded where major changes happen in legislation or within the fund (such as a member commencing pension).
Your role as the trustee of a self-managed superannuation fund comes with a large amount of regulation that you must be aware of.
If you believe any of the circumstances above apply to your fund, please contact your local Accru office to discuss and avoid a negative outcome from your next SMSF audit.