News / Feb 15, 2022

SMSF Compliance Obligations – Everything You Need to Know

Mark Phillips
SMSF Compliance
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The number one reason people choose self-managed super funds over public or retail ones is control over their assets and the investment strategy that will eventually deliver their retirement benefits.

That might be true. But they certainly don’t have a free hand.

There are multiple compliance obligations for SMSF trustees and the accountants, financial advisers, and auditors who provide services to SMSFs. 

We have previously dealt with the technical compliance requirements for SMSF accountants and financial advisers, and SMSF auditors.

Here we will look more closely at some compliance obligations for SMSF trustees – and, by extension, the professionals they turn to for financial advice and assistance in keeping proper and accurate records. 

The SMSF Compliance Framework

The Australian Taxation Office (ATO) is the regulator for SMSFs. 

Super Fund Lookup is the ATO’s external register of SMSFs’ current compliance status. Employers (or their clearing house) can utilise this service to determine whether the fund is complying, so that they can make contributions. 

The overriding legislation for SMSFs is

  • The Superannuation Industry (Supervision) Act 1993 (SIS Act) 
  • The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) 

In addition, 

  • Several sections of the Income Tax Assessment Act 1997 (ITAA ’97) apply only to super funds
  • Some States and Territories have restrictions on the number of trustees a trust may have. SMSFs should seek professional advice about how these laws might apply to them.  
  • The Corporations Act 2001 applies to SMSFs with a Corporate Trustee structure

These laws are detailed and complex, but SMSF trustees need to be familiar with them as non-compliance can lead to loss of tax concessions and even civil and criminal charges.

There is also a need for trustees to keep up with ever-changing rules. 

For example, a recent change to the wording of Section 52(2)(c) requires SMSF trustees to act in the “best financial interests”, not just in the “best interests” of members. This seems to mean that it is no longer enough for trustees to “believe” they are acting in members’ best interests or acting “in good faith”. There must be some objective proof of it. 

The legal ramifications are outlined in an article asking whether this change is “Super Complex or Super Solution”.

The point is that super laws and regulation details can be tricky. This new requirement adds pressure to decisions about the investment strategy and even day-to-day essential or discretionary payments from the fund’s bank account. It also highlights the need for detailed record keeping. 

Even the ATO recommends that SMSF trustees seek professional advice.

SMSF Compliance Checklists – Australian Tax Office

Trustees have compliance, administration, reporting, and tax obligations. 

The ATO has checklists to assist.

They cover 

Each one has its own list of things to do and remember.

For example, the SMSF compliance checklist asks whether trustees have ensured:

  • Regular review of the fund’s investment strategy
  • Separation of the fund’s assets from those of trustees or directors personally or of a related employer
  • Compliance with super laws for 
    • Fund investments
    • Contributions and rollovers received by the fund 
    • Benefit payments made by the fund 
  • Maintaining proper and accurate records for required timeframes
  • Reporting changes to SMSF’s details (e.g. bank account, electronic service address, contact details and member details) 

Clearly, all of these items need to be further unpacked and understood. 

Let’s look at some considerations for just one of them: fund investments. 

SMSF Compliance for a Fund’s Investment Strategy

Investment is a complex area of law. When in doubt, SMSF trustees should seek personal financial advice from financial advisers and accountants who have an Australian Financial Services Licence (AFSL). They should also ask for a description or relevant product disclosure statement before deciding about recommended investments. 

What is clear is that sections of the SIS Act and Regulations cannot be considered in isolation.

SMSF Compliance

Basic Rules about Investment Decisions

Basic obligations are that 

  • SMSFs must have an investment strategy, implement it, and review it regularly (Section 52(6) and Regulation 4.09). 
  • It must meet each SMSF member’s personal objectives, retirement planning, and financial situation and be updated if circumstances change.

There are very few limitations on the types of assets that super funds can invest in, provided the SMSF trust deed permits it, and trustees comply with other sections of superannuation legislation. 

A breach of investment strategy requirements could lead to a penalty of $4,200 for each trustee (ATO). 

Overlapping Rules For Self Managed Super Funds Investments

Rules about investments overlap with other regulations.

For example, a fund may have property investment as an element of its investment strategy. 

There are taxation benefits for doing so.

  • The marginal rate for rental income is 15% during the accumulation phase and tax-free in the pension phase
  • Investment properties sold after being held for more than 12 months have a one-third discount on their capital gains tax liability 
  • Interest on the investment property loan is tax-deductible

However, in implementing the strategy, trustees would have to comply with several sections of the SIS Act and Regulations, including

  • The sole purpose test (S62)
  • Limited recourse borrowing arrangements (S67)
  • Related parties (S66) and In-house assets rules (S82 – 85)
  • Commercial arm’s-length (S109)
  • Market valuation (R8.02B) and objective and supportable data

Sole Purpose Test (Section 62)

The sole purpose test requires that investments be purchased solely to provide retirement benefits to members. 

Members cannot have pre-retirement benefit from the investment – e.g., a property used as a holiday home by members. Related parties can also not benefit – e.g., a property explicitly bought as accommodation for a child while at university.

Limited Recourse Borrowing Arrangements (LRBA) (Section 67)

Self-managed funds can use limited recourse borrowing arrangements (LRBAs) to acquire property and ensure asset protection. 

  • Properties must be held in a separate trust – a bare property trust
  • The lender can claim the property if there is default in repayment but no other SMSF assets

Related parties are all fund members, spouses, children, and relatives. Business associates, associated funds, and even employers, in some cases, are also related parties.

Generally, a self-managed super fund may not acquire assets from a related party unless they are listed securities or in-house assets. They must be within the parameters for in-house assets: any loan, investment, or lease with a related party must have a value of less than 5% of the fund. 

An SMSF may not buy residential property from or lease one to a related party. 

However, a fund may acquire a commercial property from a related party and even lease it back to a  member to use for business purposes. The fund can invest in the property but not in the business operating from the premises. 
This type of transaction is exempt from the in-house assets rule but must comply with arm’s length transactions and market valuation requirements.

Commercial Arm’s Length (Section 109)

In the example of acquiring commercial property from a related party,  commercial arm’s length means that the price paid, rental charged, and lease agreements – including follow-up on any violations – should be the same as would be applied to anyone else. 

Any detriment to the fund – for example, a lower rental or lower-than-market interest charges on outstanding payments – would be warning signals.

Trustees must apply reasonable commercial terms to all investment decisions, not just transactions involving related parties.  

There are negative tax implications for NALI – non-arm’s-length income (Section 295-550, ITAA ‘97). This might happen if the income derived from interest on loans, rent from property, profit from the sale of assets, or dividends from private companies is more than might have been expected, and there seems to be a special arrangement for the SMSF.

Market Value (Regulation 8.02B)

The market value of assets is integral to determining arm’s length transactions. 

It is also critical for reporting requirements and is used for 

  • A fund’s financial statements 
  • Audits
  • Actuarial certificates, and 
  • The SMSF annual return to the Taxation Office.

It is the responsibility of trustees to use “fair and reasonable” means to provide “objective and supportable” evidence of the value of assets. They might use professional advice from real estate agents or compare property sales.  

The market valuation is the also basis for determining, among other things,

  • Total super balance amounts
  • The account balances for the commencement of a retirement income stream 
  • Transfer balance cap ($1.7 million), and 
  • Compliance with the 5% ceiling for in-house assets  

How SMSF Engine Can Help With Your SMSF Compliance Obligations

Consistent SMSF administration is a major tool to ensure SMSF compliance with the Australian Taxation Office and superannuation legislation.

SMSF Engine is an Australian-owned and operated administration service provider. Our team of experts have superannuation and SMSF experience going back to 2004.  

Whether you are an individual SMSF or an SMSF accountant or financial adviser providing services to multiple funds, SMSF Engine is well-placed to help you meet your requirements for 

  • SMSF setup 
  • Trust deeds
  • Financial statements
  • Audits
  • Actuarial certificates
  • Tax returns
  • Property valuations and title searches
  • Investment strategy preparation

We offer the choice of a premium daily administration service or a simple, low-cost annual service. We bundle services to give the most cost-effective options.

We pride ourselves on our ability to tailor our SMSF services to meet the specific needs of accountants, financial planners, and SMSF trustees. You are not limited by the size of your fund, the number of transactions it has during the year, or how many members there are.

Key Takeaways

SMSFs can be an excellent way to invest in retirement planning. But staying compliant with regulatory and legislative requirements can be tricky. 

You cannot look at Sections of the SIS Act, Regulations, and the Taxation Act in isolation. Trustees and their accountants and financial advisers must be aware of significant overlaps and cross applications.

This article has outlined some of the SMSF compliance issues involved in property investment decisions.

SMSF trustees are advised to seek personal financial advice and perhaps also administration support to ensure that they achieve the benefits of SMSFs and avoid loss of tax benefits and risk of civil and even criminal action.

Learn more

If you would like to learn more about how SMSF Engine can help you ensure SMSF compliance, make an appointment to speak with one of our specialists.

Book Mark Phillips or Book Alex Polorotoff

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