Self-Managed Superannuation Fund (SMSF) Part 2 – What you need to know

In Part 1 we introduced SMSF, outlining what it is, who it’s for and the structures involved. In Part 2, we will discuss SMSF aspects including contribution and rollovers, investing, paying benefits, and winding up.

Contributions 

A trustee of SMSF can accept contributions and rollovers from different sources on behalf of the fund members. 

Contributions are payments made to the funds. Allowable contributions are subject to specific criteria. These include:

     •  A member’s tax file number (TFN)

     •  The type of contribution – whether it is an mandated or non-mandated contribution.

     •  A member’s age – whether they are under or over the age of 75.

     •  The contribution cap limit – currently $27,500 for concessional contributions at all ages and $110,000 for non-concessional contributions

Rollovers

Rollovers refer to when a member transfers their funds from an existing super via a SuperStream. A SuperStream is a system that allows one to send data and make contributions to their super funds.  There are several requirements during each process of a rollover as follows:

1. Receiving a rollover requires:

     •  A registered status on SuperFund lookup

     •  An active Electronic Service Address (ESA) registered for rollover services

     •  An Australian Business Number (ABN)

     •  Up to date records with ATO

2. Making a rollover requires you to:

     •  Validate your TFN with SMSFmemberTICK system – a system that verifies a member’s TFN and identity.

     •  Verify the fund and members details with the SMSF verification service or the Fund Validation Service.

     •  Complete the rollover via Super stream within 3 business days after receiving all information required.

Reporting a rollover as an assessable income is necessary only if the rollover amount includes an untaxed element in the fund, but all member’s contributions must be reported in the SMSF annual return.

Investing

Manage investment funds in the best financial interests of fund members and in accordance with the law. This can be done through the following:

1. Investment Strategy

An investment strategy which is a tailored and specific plan for making, holding, and realising assets that aligns with the retirement goals of the fund’s members. When creating the strategy consider:

     •  Meeting each member’s retirement objectives

     •  Fund member’s ages, employment status and retirement needs

     •  Potential investment risks

     •  The composition of your fund’s investments

     •  Liquidity of the fund’s assets

     •  Fund’s ability to pay benefits

When investing in a fund, it is crucial to ensure that it complies with the trust deed and super laws, and meets the sole purpose test of providing retirement benefits. Monitoring investment risks such as return, volatility , and liquidity is also essential, and diversifying your portfolio can help minimise these risks.

2. Ownership and Protection of Assets

Recording the assets in a way that distinguishes them from personal or business assets to define clear legal ownership and protection of assets by the fund. The assets can be held by individual trustees as trustees for the fund or by a corporate trustee as trustee for the fund. Opting for a corporate trustee is recommended as it simplifies compliance with ownership regulations since any change in directors would not affect the fund. However, if individual trustees join or leave the fund, it is necessary to update all documentation and maintain a record of the change.

3. Keeping a commercial ‘arm’s length’ basis

Keeping a commercial ‘arm’s length’ basis for all investments. Meaning that the purchase and sale price of a fund assets should reflect true market value and the income should reflect true market rate of return. As an SMSF you cannot borrow money, buy assets from, or lend money to fund members or other parties, unless exceptions exist. Significant penalties can be imposed if you don’t comply with the investment restriction.

4. Sole purpose test

Carrying on a business that is approved under the trust deed and operated for the sole purpose of providing retirement benefits for fund members. The trustee of an SMSF must ensure that the sole purpose test is not breached when carrying on a business. Cases that could lead to a breach include:

     •  Employing a family member

     •  Carrying out activities commonly done as a hobby

     •  Having links to associated trading entities

     •  Indications that the fund’s business assets are available for private use and benefit the trustee or related parties.

Paying Benefits

Before paying a member’s super benefits, you must ensure the member has reached their preservation age, met one of the conditions of release and that the governing rules of the fund allow it.

1. The preservation age ranges from 55 to 60 depending on the member’s date of birth.

2. The conditions of release are dependent on whether a member satisfies the following:

     •  Reached the preservation age and retiring

     •  Reached the preservation age and begins a transition to retirement income stream

     •  Ceased employment arrangement on or after the age of 60

     •  Is 65 years old

     •  Has died

3. There are also special circumstances which allow for early release of benefits however it is illegal if a member has not met a condition of release and received benefits. This can result in administrative penalties, additional income tax and disqualification as a trustee.

Winding up

Winding up an SMSF should meet all obligations to avoid penalties. 

There are various reasons why trustees choose to wind up an SMSF such as the death of a trustee, disability or illness, lack of time to manage, inability to meet ongoing costs etc.

If the time does come to wind up, having an exit plan will make it easier to help you determine your member’s circumstances and signing off all trustees.  This plan should consider:

     •  How to deal with members benefit upon death

     •  Appointing an enduring power of attorney

     •  Estimated costs of winding up

     •  Liquidity of fund’s assets

     •  Being Super stream ready to enable roll out of benefits

     •  Who will keep copies of the funds records and transactions?

Key Tasks

When winding up the fund, the key tasks include:

     •  Reviewing the winding up checklist

     •  Checking the trust deed

     •  Receiving a written agreement from all trustees

     •  Selling or disposing of all assets

     •  Finalising outstanding tax and compliance obligations

     •  Paying outstanding expenses and tax liabilities

     •  Distributing member benefits

     •  Completing final audit and lodge final returns

     •  Notifying third parties

     •  Closing the fund’s bank account

How Wilson & Assoc can help?

Our team has experience in managing all business structures from registration to exit processes. We will help you understand the processes and guide you through each step of the way.

Source: Australian Tax OfficeWind