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How to achieve a perfect compliance scorecard

Oct 8, 2018, 11:44 AM

By Graeme Colley

Graeme Colley SuperConcepts SMSF expert

DIY superannuation offers greater control — which is the central appeal for many — but also entails a host of responsibilities. With the need to adhere to myriad rules and requirements, here's how to achieve the perfect compliance scorecard.

Make sure the fund has been set up correctly

This is the foundation that the whole thing hangs on. Getting the setup right gives you access to the tax advantages associated with contributions, investment income and benefits.

Here’s a list to consider as part of the setup process.

  • Determine who the members of the fund will be
  • Choose a trustee structure – either individual trustees or a corporate trustee
  • Choose and execute a suitable trust deed
  • Set up a bank account for the fund
  • Register the fund with the ATO
  • Obtain an electronic service address so the fund can receive employer contributions

Managing the fund’s investment strategy

The fund must have an investment strategy stipulating its investment objectives and allowable investment categories.

It should be in writing and consider the personal circumstances of fund members, including their age and investment risk tolerance. And it should be reviewed regularly.

Here are some points to consider in developing and managing an investment strategy.

  • Diversification – to what extent should the fund be diversified with regard to individual investments as well as asset classes such as cash, shares and property?
  • Liquidity – can the fund pay benefits to members and other expenses when required?
  • Insurance – should policies be held for fund members?
  • Ongoing relevance – does your fund continue to reflect its purpose and any changes in its members’ circumstances?

Managing the actual investments

Your fund, depending on its trust deed and investment strategy, may have a wide range of permissible investments including public and private company shares, managed funds, private trusts, cash and term deposits, direct property, and even artworks and collectibles.

Where the investments are made in arm’s length to third parties on commercial terms there are few issues outside the norm that need to be considered. However, with investments involving related parties such as family companies or family unit trusts, restrictions may apply. As these rules can be complex, guidance from an SMSF expert can be useful.

Points to consider when investing.

  • Is the investment permissible in terms of the fund’s trust deed and investment strategy?
  • Have you checked whether there are any other restrictions or prohibitions with the proposed investment
  • Have you ensured the investment is on an arm’s length commercial basis?
  • If the investment involves related parties, does it meet the relevant regulatory provisions?
  • Have you kept copies of documents and other records concerning the investments, especially those involving related parties?

Managing contributions

You need to understand the rules around contributions – particularly when they can and can’t be accepted. Contributions that may be accepted by the fund can depend on the member’s age, whether the contributions are personal or employer contributions, and whether members older than 65 have met a work test.

Here are some questions to consider.

  • Have you identified whether the contribution can be accepted by the fund because of the type of contribution, member’s age and work status?
  • Have you obtained information about the contribution to determine whether it should be included in your fund’s taxable income?
  • Have you received an election from a member concerning the tax deductibility of personal contributions?
  • Have you recognised which contributions are counted against a member’s concessional and non-concessional contributions caps and obtained the correct member elections?

Paying an income stream

The main purpose of any superannuation account is the eventual payment of benefits.

Before paying a lump sum or pension you need to ensure the member has met a condition of release such as retirement or reaching age 65.

Before an income stream can commence, some calculations are required which are based on the value of the member’s accumulation account and their age. Each year a minimum amount of the income stream is required to be paid. When commencing or paying an income stream from your SMSF, make sure:

  • The member’s account balance has been valued according to ATO ‘market value’ guidelines
  • The minimum amount of the income stream for the year has been calculated
  • A maximum pension amount has been calculated in the case of a transition to retirement income stream
  • The income stream is being paid in accordance with the member’s instructions
  • The value of the income stream at the time it commences or is commuted is reported to the ATO for transfer balance cap purposes

Meeting all reporting requirements

It is the responsibility of trustees to ensure formal reporting requirements are met. This includes the fund’s income tax and regulatory returns, PAYG information and transfer balance cap information.

In fulfilling reporting requirements there is the need to appoint an auditor – and in some cases to engage an actuary to provide a certificate for tax and solvency purposes.

As fund trustee your responsibility is as follows.

  • Arrange for the preparation of annual fund accounts 
  • Arrange for the preparation of the fund’s annual income tax and regulatory returns
  • Appoint an auditor to the fund
  • Obtain an actuarial certificate from a qualified actuary if the fund is required to use the proportional basis to calculate its taxable and tax-exempt income
  • Value the fund’s assets at their market value
  • Make sure that the minimum pension amounts have been paid to members
  • Report debits and credits to the ATO for transfer balance cap purposes
  • Notify the ATO of changes to the trustees or directors of the corporate trustee
  • Notify ASIC of changes to directors of the corporate trustee
  • Retain the fund records

 When the time comes: winding up your fund

There may come a time when you have to wind up a fund – maybe due to a member’s death, loss of a member’s legal capacity, or simply that the fund has served its useful life and run out of money.

When winding up your SMSF, consider these questions.

  • Have you read the fund’s trust deed and other documents to see what’s required to wind up the fund?
  • Have you accounted for any income the fund expects to receive and paid any expenses that are due for payment?
  • Have you paid out benefits to members or rolled them over to a fund nominated by the member?
  • Have you arranged for final set formal reporting – fund accounts, income tax and regulatory return, and the associated audit function?
  • Have you paid any outstanding expenses such as income tax on the fund’s income?
  • Have you closed the fund’s bank account after all liabilities have been satisfied and income has been accounted for?
  • Have you notified ASIC if the fund has a corporate trustee?