What Is
Superannuation?
Superannuation is a long-term savings arrangement that operates primarily to
provide income for retirement. Superannuation involves employers, the
self-employed and employees making contributions over a period of time to a
superannuation fund.
The superannuation fund holds the contributions in trust for the member and
invests them to increase the funds assets. These assets are then used to
provide benefits to members when they retire or suffer a serious disability,
or to member's families if the member dies.
The Government taxes superannuation savings at lower rates than normal
savings if the superannuation fund complies with certain conditions. This
aspect along with the accumulation of funds earnings from investment,
combine to produce a larger benefit for retirement.
What Is A Self Managed Superannuation Fund?
A superannuation fund is a self-managed superannuation fund (SMSF) if it
meets the following conditions:
- Has less than 5 members;
- Each individual trustee of the
fund is a fund member;
- Each member of the fund is a
trustee;
- No member of the fund is an
employee of another member of the fund, unless those members are related;
- No trustee of the fund receives
any remuneration for his or her services as a trustee.
A SMSF can also have a company as a
trustee (known as a corporate trustee) if:
- Each director of the company is a
member of the fund;
- Each member of the fund is a
director of the company; and
- The fund has less than 5 members,
no member is an employee of another member (unless related) and the
trustee does not receive remuneration for their services as a trustee.
The requirement that all members be
trustees ensures that each member is fully involved and has the opportunity
to participate in the decision-making processes of the fund. This promotes
true self-management. The Australian Taxation Office (ATO) will regulate
funds that meet the definition of SMSF. Special rules apply to single member
funds, members who are minors and funds when a member has died.
Remuneration / reimbursement of trustees
The definition of a SMSF requires that trustees cannot be remunerated for
their services as a trustee. That is, trustees cannot be paid any amount for
carrying out normal activities of a trustee (eg: participating in trustee
decision making, attending meetings etc).
Trustees can however be reimbursed by the fund for costs incurred on behalf
of the fund.
What if the fund ceases to be a SMSF?
If a fund no longer meets the definition of a SMSF, it will remain a SMSF
until the earlier of:
- The appointment of an approved
trustee; or
- 6 months from the event that
caused the fund to fail the definition.
This 6 months allows the fund time
to restructure (for example, by transferring the member/s out of the fund)
if it wishes to remain within the SMSF definition. However, this extension
does not apply if the reason for ceasing to be a SMSF is the admission of
one or more new members.
Advantages Of Setting Up A Self-Managed Superannuation Fund
Some of the advantages people see in running their own superannuation fund
are:
- They can have greater investment
freedom;
- They feel the monies are safer
being invested by them as trustees;
- They can actively participate in
the management of the fund;
- There are reduced formal
reporting requirements; and
- Often more flexible retirement
planning and estate planning options available.
However, setting up a SMSF is not
for everyone. It does require at least a basic knowledge of the legislation
that they as Trustees must comply with and the use of an experienced
superannuation adviser.
Duties Of Trustees (Self Managed Superannuation Funds)
Trustees of SMSF's are the ones who are ultimately responsible for the
running of their fund. It is imperative that each trustee understands the
duties, responsibilities and obligations of being a trustee. Rules exist to
ensure the protection of the assets in the fund until they are needed at
retirement. There are significant penalties imposed on trustees who fail to
perform their duties.
Key responsibilities
A trustee of a SMSF must act in accordance with:
- The clauses of the superannuation
fund trust deed;
- The provisions of the
Superannuation Industry (Supervision) Act 1993 (SIS); and
- Other general rules, for example
those imposed under tax law and trust law.
The SIS covenants
The SIS Act contains covenants or rules that impose certain requirements on
trustees and are deemed to be included in the trust deed of every regulated
fund. These covenants set out the duties imposed on a trustee under trust
law in general. They require trustees to:
- Act honestly in all matters;
- Exercise the same degree of care,
skill and diligence as an ordinary prudent person;
- Act in the best interest of the
fund members;
- Keep the assets of the fund
separate from other assets (e.g. the trustee’s personal assets);
- Retain control over the fund;
- Develop and implement an
investment strategy;
- Allow members access to certain
information.
Delegating certain
responsibilities to a service provider
Whilst trustees are not prevented from engaging or authorising other persons
to do certain acts or things on their behalf (e.g. engaging the services of
an investment adviser), they are bound to retain control over the fund.
Ultimate responsibility and accountability for running the fund in a prudent
manner lies with the trustees. |
Keeping
superannuation money and other assets separate
Trustees of SMSFs must keep money and other assets of the superannuation
fund separate from their own personal assets. Similarly, the assets of the
superannuation fund must also be kept separate from those belonging to a
business (e.g. a business run by two partners who decide to set up a SMSF).
Money belonging to the fund must not, under any circumstance, be used for
personal or business purposes. This money is for retirement purposes and
generally cannot be accessed until retirement. The fund’s assets must not be
viewed as a form of credit or emergency reserve when faced with a sudden
need.
Sole Purpose Test
It is the trustee’s responsibility to ensure that a SMSF is operated for the
sole purpose of providing retirement benefits for members or member’s
dependants.
The Core purpose of superannuation is to supply benefits to a member when
the following events occur:
- On or after retirement from
gainful employment, or
- Attaining a prescribed age, and
- On the member’s death.
The Ancillary purposes cover the
provision of benefits for members in the following circumstances:
- Termination of the member’s
employment with an employer who, at any time, had made contributions to
the fund for that member;
- Cessation of employment due to
ill-health (whether physical or mental);
- Death of the member after
retirement where the benefits are paid to the member’s dependants or legal
representative or both;
- Death of the member after
attaining the age of 65 where the benefits are paid to the member’s
dependants or legal representative or both;
- Other ancillary purposes approved
in writing by the Australian Prudential Regulation Authority.
This last ancillary purpose allows a
fund to provide benefits in situations of financial hardship and / or on
compassionate grounds.
Breach of the sole purpose test
One of the main ways to determine if a fund has breached the sole purpose
test is to examine the character and purpose of the fund’s investments. One
example is where the investment arrangement indicates that the purpose of
the fund is to provide financial assistance to another party who is not a
member or beneficiary of the fund itself.
Another indication that a breach of the sole purpose test may have occurred
is when a fund is ‘running a business’ as part of its investment strategy.
Our experience is that where a large proportion of fund assets are used to
conduct a business within a SMSF, there is a real risk that the trustees of
the fund may lose sight of their obligation to comply with the sole purpose
test (and/or other provisions of SIS) at all times. This is because other
purposes may come to the fore in operating the business.
Trustees who breach the sole purpose test face civil and criminal penalties.
A breach of the sole purpose test is the most serious breach. It can result
in a fine of up to $220 000 on individual trustees and 5 years imprisonment.
Higher penalties apply to corporate trustees.
Managing Investments
In making investment decisions the trustees must act in accordance with the
funds trust deed, investment strategy and the provisions of SIS. Some of the
more important issues to consider when investing a SMSF’s assets include:
Investment Strategy
Under SIS all SMSFs are required to have an investment strategy. The
trustees are responsible for formulating an appropriate investment strategy
and it is strongly recommended that the strategy be in writing. All
investments must be made in accordance with the investment strategy of the
fund.
Investment Restrictions
SIS sets out various rules and restrictions on investments. These include:
- Lending to members and their
relatives.
- Acquisition of assets from
‘related parties’ of the fund.
- Borrowing by superannuation
funds.
- In-house assets.
- Investments must be made and
maintained on an ‘arms length’ basis.
These rules are quite complex and
professional advice should be sought if a Trustee is uncertain as to the
legality of a proposed investment transaction.
Other than the rules discussed
above, superannuation funds can generally invest in:
- Shares (domestic and
international).
- Managed funds.
- Property (domestic and
commercial).
- Certain related unit trusts.
Super Matters provides specialist
superannuation services, including fund administration - structuring advice
on issues such as pension payments and asset allocation.
Should you have any questions on Self-Managed Superannuation, please do not
hesitate to contact us.
Disclaimer: This article is
not highly technical in nature and is not intended to be financial planning
or estate planning advice – it is general information only.
No reliance should be placed on this document by any person and no one
should act on information included in this document without seeking
appropriate legal advice.
Super Matters are not solicitors and the information in this article is our
interpretation of the subject matter, based on our understanding of the laws
that exist at the time of writing.
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