In the dash to establish self-managed super funds (SMSFs) before June 30 last year, some investors may not have been fully aware of their obligations as trustees managing super funds. Accordingly, the Australian Taxation Office (ATO), which is responsible for monitoring DIY super funds, has announced reviews of 10,000 of Australia’s 360,000 SMSFs (that have four or less members) and 900 auditors in 2008. While most breaches are usually unintended, the gloves are off, and ignorance will no longer be an adequate defence should the taxman come knocking.
Paul Sarkis, MLC’s Technical Manager, says last year’s spike in SMSFs – around 11,500 new funds registered in June 2007 with the ATO – was undeniably linked to last year’s “million-dollar window”, where individuals could deposit $1 million in their super fund before new contribution limits kicked in on July 1, 2007. However, for the past decade or so, more Australians – particularly small business people – have flocked to SMSF funds (around 2500 to 3000 new registrations a month) because of the investment flexibility offered by DIY super.
In truth, it’s possible to put super contributions towards a wide range of investments, from shares and property to a Brett Whiteley masterwork, fishing or taxi licences. But with this investment choice and flexibility comes extra trustee accountability.
As an SMSF trustee, you are responsible for your fund’s administration, management and compliance. This is where you need to find a good day-to-day fund administration platform like MLC Masterkey Custom’s Self Managed Super Service. However, as Sarkis explains, for those who prefer a DIY administration approach, there are some common trustee mistakes.
“There is still plenty of evidence suggesting many [SMSFs] don’t lodge their returns on time, which is a basic task all trustees need to address.”
Likewise, appropriate records for contributions made and the tax liabilities around each member’s benefits need to be maintained.
Superannuation investment restrictions can also trip up greenhorn trustees. For example, transactions must be recorded in the name of the fund.
“Trustees sometimes establish a common bank account which isn’t in the name of the fund. So there is no separation between the assets in the SMSF and personal assets. That’s a common [and costly] mistake,” Sarkis explains.
Transactions, too, must be completed on an arms-length basis.
“For example, you can’t acquire a residential property from a related party. However it’s possible to acquire listed securities, managed funds and business real property from a related party. You have to make sure [investments] comply with this restriction,” he warns.
There are more rules that can catch out trustees (see box) and it would be worth consulting your planner for more detail or visiting the ATO’s website at www.ato.gov.au.
Aside from compliance, studies often show many trustees tend to be too conservative with the investment choices they make for their DIY fund. For example, the cash component of the assets is often too high, especially if the trustees are still decades from retirement. So, with the help of a planner, trustees need to make firm decisions about what portion of their super is in cash, shares, property and fixed interest rather than just letting the cash component build as a result of inexperience or inaction.
Tax office checks
As part of its annual compliance review, the ATO identifies potential risk areas to focus its activities on, such as the $1 million window of opportunity of 2006/07.
“On the back of that, there is a compliance focus in 2008 on people who sold assets to fund contributions, transferred assets into super and who paid capital gains tax on the disposal of the assets prior to going into super,” says Sarkis.
“The ATO is also concerned about the valuations of the assets. If you transferred a property to your SMSF, say a business real property, to take advantage of the $1 million opportunity, they may want to look at the valuation you used. They want to make sure it wasn’t a $1.2 million property that you’ve given a $1 million price tag.”
Potential breaches like a valuation fiddle also explains the ATO renewed focus on SMSF auditors.
“It’s like any profession. Some are very thorough, while others are less so. There is evidence that some auditors, whilst doing a good job reviewing the financial statements, could do more to verify compliance with superannuation,” says Sarkis.
For its clients’ peace of mind, MLC MasterKey Custom uses KPMG – one of the biggest names in the auditing business – for SMSF audits.
“They review our processes and systems to make sure there are no systematic issues. Then they’ll go through the individual funds. It’s only when they find a contravention that they’ll get in touch with the trustees directly. But that is very rare because [MLC] has processes to ensure that contraventions don’t happen in the first place,” Sarkis explains.
The ATO is also contacting new SMSF trustees to ensure they understand their obligations, have sufficient knowledge and the appropriate service providers in place.
“From July 1, 2007, all trustees have to sign a declaration that they understand their obligations as trustees. The ATO will check that all [trustees] have signed that declaration, and where they haven’t, there are penalties. Where they have, the ATO will no longer accept the excuse that, ‘I didn’t know’ going forward.”
The declaration outlines the high-level responsibilities of trustees, including record keeping and investment restrictions. As the fund administrator, MLC MasterKey Custom sends this declaration whenever a new SMSF signs up.
“An adviser works closely with the client and will discuss their obligations with them.”
The ATO also has plenty of publications and guidelines about SMSFs that trustees can read online.
“The ATO is getting much better at communicating with and providing guidance for SMSF trustees,” says Sarkis. “They have also stepped up compliance activity and put on more staff to try to identify breaches rather than waiting to discover mistakes down the track.”
KEY POINTS
As a trustee of a SMSF, you must:
- Comply with the sole purpose test to maintain a super fund only for the purpose of providing benefits to members on their retirement, or to dependants in the case of a member’s death before retirement.
- Act honestly in all matters and in the best interests of fund members.
- Exercise the same degree of care, skill and diligence as an ordinary prudent person.
- Not access the money without meeting a specific condition of release.
- Not lend superannuation money to members or relatives.
- Not borrow money or let the fund’s bank account become overdrawn (some exceptions apply).
- Understand and apply the rules when acquiring assets from related parties.
- Understand and adhere to the in-house asset rules.
- Comply with the contribution and payment standards.
- Not allow disqualified people to be trustees and inform the regulator if a trustee becomes disqualified at any time.
You can download the Role and Responsibilities of Trustees booklet at www.ato.gov.au/content/downloads/n11032.pdf.
