SMSF trustees have some practical jobs to do.
For example, as trustee, you’ll be responsible for:
- Choosing your fund’s investments,
- Deciding who can join your fund,
- Lodging an annual return (which includes a tax return),
- Keeping records,
- Taking contributions and making payments to members or their beneficiaries when they’re entitled to them, and
- Arranging insurance if necessary.
Trustees also have some specific obligations under the super rules.
These can be divided broadly into the three groups below. But don’t forget you can get help:
- Firms like Heffron can prepare returns for you (like your accountant might prepare your personal tax return) and make sure you have all the right records.
- A financial adviser can help you decide on your investments and insurance.
The ‘self managed’ part of SMSF is more about being in control of the decisions. It doesn’t mean you have to do everything yourself.
Let’s get a bit more specific about the three groups of obligations under the super laws.
The "why are we here?" rule (otherwise known as the "sole purpose test)
All super funds (including SMSFs) pay quite low rates of tax. Governments have always been happy to do that because by building up super, you're helping to support yourself and your family when you stop working rather than relying on the age pension.
But it's important that your SMSF is clearly set up and managed for that purpose – ie it exists to help you save for retirement or protect your family if you die. While it's allowed to do other things as well, this central purpose (called the "sole purpose" in the super law) is important and should guide every decision you make for your SMSF.
For example, Joe has an SMSF and decides to invest some of his money in his friend's business. He doesn't actually hold out much hope for the business but he'd like to support his friend. He's been lucky over the years and has built up a large super balance so wants to use some of that money to help his friend. A decision like that isn't consistent with the sole purpose test at all. Joe isn't making this investment decision to secure his retirement, he's trying to help a friend. He's free to do that with his own money but not the money he's put into his SMSF.
General standards
The super laws set out some general rules about how trustees are expected to behave. While they can sound confusing, they actually make a lot of sense. The list below (with a translation) doesn't cover everything but it captures the main responsibilities you have as a trustee of an SMSF.
| The way the requirements are often described | What this really means |
| Comply with the trust deed | Every SMSF has its own rule book (the "trust deed"). This is something you buy when you set up your fund. Often these are fairly broad ("follow the super rules") but sometimes they include extra rules. Your accountant will know whether this applies in your case. |
| Act honestly | No explanation needed! |
| Act in the best interests of the members | This might sound easy – after all, doesn't that mean you're looking after your own interests? And yes, it's easy when you're the only member. But if there are other members, all of the trustees are expected to care about the interests of all the members. If there's a dispute, for example, as a trustee you have to be fair and balanced even though you might have a very firm view about what you want as a member! |
| Keep the assets of the fund separate from other assets | It's got to be very clear what the SMSF owns. The SMSF's investments should be quite separate from your own. Don't share a bank account with your SMSF, for example. Make sure any contracts are in the right name (the trustee of the fund). |
| Exercise the same degree of care, skill and diligence as an ordinary prudent person in managing the fund | This is where it's often useful to imagine that you're managing someone else's money and you're trying to maximise their retirement savings. Would you do what you're about to do? |
| Make investments on an arm's length basis | Make sure investments are always made on commercial terms. This sounds easy - particularly if your SMSF is always dealing with people who are completely independent of you. But remember you have to think of your SMSF as being a completely separate "thing" to your own money. What if you're negotiating to buy two properties from an independent party. You’re buying one personally and your SMSF is buying the other. The seller is happy to charge a little less for the one you're buying personally if you'll pay a little more for the one being bought by the super fund. While that deal might look commercial in aggregate, it's not if you look at the SMSF completely in isolation. |
| Formulate, regularly review, and give effect to an investment strategy for the fund | SMSFs are all about investing for retirement so one of the most important things you'll do is invest the fund's money. Once again, you don't have to be an investment expert but you must have a plan for the money. Think about how much risk you want to take, how much of the SMSF should be in one investment, whether your investments will produce the cash flow you need to make pension payments etc. (There is a handy list of specific things to consider in the super law itself - ask your accountant or investment adviser for help here). And review your plan regularly - are you achieving what you set out to achieve? Have circumstances changed? |
A lot of very specific rules
As well as the sole purpose test and general standards, trustees of SMSFs also have to follow a lot of quite specific rules. Most of these also apply to all other funds but with those funds, someone else (their trustee) is responsible for making sure they’re followed.
For example, there are rules about:
- Who can put money into the fund and when.
- When you can take super out of your SMSF.
- The sorts of investments your fund can make. While most mainstream things are fine (shares listed on a stock exchange, managed funds, properties, term deposits and many more) there are some investments that are not allowed or where there are extra rules. For example, SMSFs can buy paintings. But if they do, there are a whole lot of rules to follow.
- From whom your SMSF can buy its investments. For example, many people sell things they already own (such as shares they hold personally) to their SMSF. There is a very small list of investments that can be transferred like this.
- Who your SMSF can deal with when it comes to investments. For example, your SMSF can own a home but it can’t rent it out to a family member.
- Who it can pay for services. For example, SMSF trustees can’t be paid for being a trustee. Any time work for your SMSF is being done by you or someone you’re associated with, you should check what’s allowed.
By and large, if you’re just doing “normal” things – like having contributions paid in from an employer, investing in mainstream things like the ones listed above, not including your SMSF in any financial dealings you have with other people in your family or business you’ll be fine.
This is where partnering with Heffron is so useful – you can check in with us any time you want to do something new.
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When you have an SMSF, you control the bank account and all the investments. Moving money out of the fund to your personal bank account can be as simple as a couple of clicks on your online banking app. If you're short on cash it can be tempting! But it's one of the things the ATO treats extremely harshly. You're not allowed to dip into your retirements savings early, even temporarily. |
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