Common trustee trip-ups and how to avoid them

Administering and ReportingSMSF InsightsUnderstanding SMSFs

Common trustee trip-ups and how to avoid them

May 2018

Jordan George, Head of Policy, SMSF Association

With the flurry of new superannuation changes, running an SMSF can be complex. While taking advice from professional advisors is encouraged to help you run your fund, ultimately you, as an SMSF trustee, are responsible for complying with the superannuation and tax laws.

The reality is that the vast majority of trustee mistakes result from lack of up-to-date knowledge and could be minimised with good advice and trustee knowledge.

There are some common mistakes which trustees should be aware of and ensure any mistake is rectified as soon as possible.


It is important that trustees keep on top of their reporting requirements.  Too often these obligations are left too late, leaving the SMSF exposed to penalties and excess taxes.

It is important trustees have the time and knowledge to ensure all their paperwork is complete and up to date. If not, they should get professional assistance to ensure their fund is compliant at all times. Remember, all funds must be audited by a professional SMSF auditor each financial year.

Record keeping is even more relevant with the requirement that SMSFs report events that affect the $1.6 million transfer balance cap to the ATO from 1 July 2018.

For around 85% of SMSFs this will be an annual requirement. However, funds with a member who is in retirement phase, is receiving a superannuation pension and has a total superannuation balance above $1 million, will be required to report events affecting their members’ transfer balance caps quarterly.

Events that impact the transfer balance include starting a retirement phase income stream or stopping this income stream.

Where you have exceeded your $1.6 million transfer balance cap, this will need to be rectified immediately.  A common way to remove the excess will be to commute in part or in full a superannuation income stream.

Investment Strategy

A key reason for many individuals choosing an SMSF is to have control over their fund’s investments. However, this freedom of choice must be balanced with the trustee responsibilities which require that SMSF investments be made in a manner that is prudent and in accordance with the superannuation laws.

A common mistake is a ‘set and forget’ approach.  As a trustee, you should regularly review the investments of the fund considering all of the SMSF’s circumstances including investment risk, likely investment returns, liquidity and cash flow requirements, diversification of investments and insurance for members.

The needs of members throughout the life of the fund will change and these should be regularly reviewed and planned for accordingly.

SMSF trustees are generally aware of the benefits of diversification, but many trustees still focus their investment portfolios in just two assets: Australian shares and Australian property.  Seeking professional advice can assist you in having a diversified portfolio tailored to your risk profile.

Superannuation laws require trustees to consider insurance for fund members when drafting the investment strategy and requires the owner of the policy to be the SMSF trustee. If the policy owner is an individual, and not the SMSF, this can be a breach of the legislation.

Caution is also required when transferring existing insurance policies into a newly established SMSF.  You need to notify the insurer so they can adjust the policy details.

The property trap

There are strict rules around real estate investment that can catch trustees unaware. An SMSF can’t buy a residential property for fund members to live in, or even use as a holiday home.

Business real property is the exception to this rule and generally means the land and building is used wholly and exclusively in a business.  To avoid breaches around business real property, it is essential that the transaction is done at market value and is well documented.

SMSFs can borrow using limited recourse borrowing arrangements (LRBA), but they must comply with very specific legal requirements. Getting professional advice from an SMSF specialist is strongly recommended before entering into an LRBA.

Remember, too, that while trustees are allowed to maintain a property with borrowed funds, it can’t be improved with borrowed money.

Sole Purpose Test

This test lies at the core of SMSF compliance. As the title suggests it simply says a fund needs to be maintained for the “sole purpose” of providing retirement and/or death benefits to fund members (or their dependants if a member dies before retirement).

However, some trustees still believe SMSF assets can have other uses. They can’t and the ATO will penalise you for doing so.

It’s likely your fund will not meet the sole purpose test if you or anyone else, directly or indirectly, obtains a financial benefit when making investment decisions and arrangements.

When investing in collectables such as art or wine, you need to make sure that SMSF members don’t have use of, or access to, the assets of the SMSF.

Member loans

A good example of how fund members can transgress the Sole Purpose Test, are member loans.

Many small business people have SMSFs and wrongly believe they can tap their superannuation to prop up their business in tough times. The rationale is that it’s their money so what’s the harm with giving themselves a short-term loan.

Well, there are no occasions where an SMSF can loan money to fund members and funds that do so will can face strong penalties.

SMSF Auditor

An approved SMSF auditor needs to be appointed to audit the fund each year. This includes examining the fund’s financial statements and assessing compliance with the relevant superannuation laws.

Many trustees overlook this requirement, where no contributions or payments are made in the financial year.  However, an audit is required regardless of the activities and asset values with in the fund.

Your auditor should advise you of any breaches of the rules. You, as trustee, should rectify any contravention as soon as possible.  These breaches will also be reported to the ATO.

What if it all goes wrong?

Any breaches of the rules should be rectified and the earlier the action the better.  Waiting until the ATO comes knocking may make it more difficult to resolve the contravention.

The ATO’s main focus is encouraging SMSF trustees to comply with the super laws, but there may be occasions where a stronger response is warranted.

The ATO will take into account the seriousness of the breach and the past compliance of your fund. Having up to date records and an understanding of your obligations will assist.  You will also need a plan in place to ensure future compliance.

An SMSF trustee may initiate in writing an undertaking to rectify a contravention.  The undertaking will include a commitment to stop the behavior and the action that will be taken to rectify the contravention.

The key to avoiding contraventions is for trustees to refresh their knowledge of relevant super laws.

This article originally appeared in the May 2018 ASX Investor Update email newsletter and is published on the ASX website here.