26/08/2024

Common Questions on SMSF Compliance

What makes an SMSF non-compliant?
An SMSF can be deemed non-compliant for various reasons, including:

Failing the sole purpose test by using the fund for purposes other than providing retirement benefits

Breaching investment restrictions, such as lending money to members or relatives

Not conducting annual audits or failing to appoint an approved SMSF auditor

Providing financial assistance to members or relatives, which is strictly prohibited

Failing to lodge annual returns or financial statements on time

Breaching in-house asset rules by investing more than 5% of the fund’s assets in related parties

Allowing early access to super benefits without meeting a condition of release

Failing to keep proper records or minutes of trustee meetings
What restrictions are there when my SMSF is not compliant?
When an SMSF is deemed non-compliant, it faces several restrictions and consequences:

Loss of tax concessions: The fund loses its concessional tax rate of 15% and is taxed at the highest marginal rate of 45% or more

Inability to receive contributions: The fund cannot accept any new contributions or rollovers from other super funds

Asset freeze: The ATO may issue a notice to freeze the fund’s assets, preventing trustees from acquiring or disposing of assets

Reporting restrictions: The fund may be required to report more frequently to the ATO

Trustee actions limited: Trustees may be restricted in their ability to make decisions or manage the fund

Disqualification of trustees: The ATO may disqualify individuals from acting as trustees

Winding up the fund: In severe cases, the fund may be forced to wind up and transfer assets to a complying fund

Penalties: Trustees may face significant financial penalties and even criminal charges for serious breaches
How often should I review my SMSF's investment strategy?
It’s recommended to review your SMSF’s investment strategy at least annually or when there are significant changes in members’ circumstances or market conditions. This review should consider:

The risk and return of investments in relation to the fund’s objectives

Diversification of the investment portfolio

The liquidity of investments to meet fund expenses and benefit payments

The fund’s ability to pay current and future benefits

Whether to hold insurance cover for members
Can I use my SMSF to buy a holiday home for personal use?

No, using SMSF assets for personal use violates the sole purpose test and can lead to non-compliance. The sole purpose test requires that the fund is maintained for the sole purpose of providing retirement benefits to members. Using SMSF assets for personal benefit, such as a holiday home, can result in severe penalties, including the fund being deemed non-compliant and losing its tax concessions.
What happens if I miss the deadline for lodging my SMSF's annual return?
Missing the lodgement deadline can have several consequences:

Penalties and fines may be imposed by the ATO

The fund may lose its tax concessions

The fund’s status on Super Fund Lookup may be changed to “regulation details removed”

The fund may not be able to receive employer contributions or rollovers from other super funds

Continued non-lodgement may lead to more severe compliance action from the ATO
Can I borrow money from my SMSF?
No, borrowing money from your SMSF is strictly prohibited and can lead to severe penalties and non-compliance. This includes:

Direct borrowing of money

Indirect borrowing through the use of credit cards or other credit facilities

Providing financial assistance to members or relatives
Breaching this rule can result in disqualification of trustees, administrative penalties, and the fund being deemed non-compliant.
How long should I keep SMSF records?
Generally, you should keep most SMSF records for at least 5 years, but some documents should be kept for longer:

Income tax and capital gains tax records: 5 years from the date they were prepared or obtained, or the date the transactions were completed, whichever is later

Member reports: 10 years

Trustee minutes and records of trustee decisions: 10 years

Trust deed and other essential documents: For the life of the fund and 5 years after the fund is wound up
What is the "in-house asset rule" and why is it important?
The in-house asset rule limits investments in related parties to 5% of the fund’s total assets. This rule is important because:

It prevents the fund from being used to support related businesses or individuals

It ensures diversification of the fund’s investments

It helps maintain the integrity of the superannuation system
Exceeding this limit can lead to non-compliance and penalties. Trustees must regularly monitor and value in-house assets to ensure compliance.
Can I fix compliance issues without the ATO finding out?
It’s always best to voluntarily disclose and rectify compliance issues. The ATO often views voluntary disclosure favourably when considering penalties. Benefits of voluntary disclosure include:

Potentially reduced penalties

Demonstrating good faith and commitment to compliance

Opportunity to work with the ATO to resolve issues

Avoiding more severe consequences if the ATO discovers the issues during an audit
What happens if a member of my SMSF becomes bankrupt?
A bankrupt individual cannot be a trustee of an SMSF. When a member becomes bankrupt:

They must resign as trustee immediately

They may need to roll their benefits to another fund

The SMSF may need to be restructured or wound up

The remaining trustees must ensure the fund continues to meet the definition of an SMSF

The bankrupt member’s benefits may be subject to claims by the bankruptcy trustee
How often does my SMSF need to be audited?
SMSFs must be audited annually by an approved SMSF auditor. This audit is crucial for:

Ensuring compliance with superannuation laws

Verifying the fund’s financial statements

Identifying and addressing potential compliance issues

Maintaining the fund’s complying status

The audit must be completed before the annual return is lodged, and the auditor’s report must be kept for at least 5 years.

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