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SMSF Trustees' Responsbilities

SMSF Trustees’ Responsibilities
By Van Moulis, Senior Lawyer, Slater & Gordon Lawyers 


Self-managed superannuation funds (“SMSF”) represent the largest component of Australia’s superannuation industry. Yet, research indicates that many SMSF investors lack knowledge of their obligations as trustees. In the July’s  Equity, ASIC’s MoneySmart provided a list of a trustee’s obligations, including legal responsibilities, to consider if contemplating rolling over your superannuation savings into a SMSF you manage yourself. This article considers some of the key legal responsibilities in further detail. 

Before starting a SMSF, it is important to understand the various obligations and prohibitions set out in the Superannuation Industry (Supervision) Act 1993 (Cth) (“Act”). If a trustee contravenes the Act, there may be civil or criminal consequences. Before making investment decisions, or following financial advice, trustees must take all reasonable steps to ensure they are complying with the Act.

Here are some of the key legal responsibilities you need to consider.  

Sole purpose test

The Act requires a trustee (often also a member) of a SMSF to ensure that all the activities of the fund relate solely to specific core purposes mandated by the Act. Essentially the core purpose of the SMSF must be to provide benefits on or after the death or retirement of each member. Provided the activities of the SMSF are designed around this core purpose, other ancillary purposes may be provided for, such as the provision of benefits to members on termination of their employment, or cessation of work due to ill-health. 

It is vital to remember that SMSFs must strictly comply with the sole purpose test at all times. The Australian Taxation Office (known as the Regulator) which oversees and regulates SMSFs has indicated that the sole purpose test extends to all activities of SMSFs including:

  • accepting contributions; 
  • investing in or acquiring assets;
  • using assets or resources of a SMSF;  
  • administering a SMSF; and 
  • paying out benefits to members. 

Lending to members prohibited

A trustee must not lend the money of a SMSF to a member or to the relative of a member. They must also not give any other financial assistance using the resources of a SMSF to a member or relative of a member. 

The Regulator specifies that financial assistance extends beyond providing loans and includes providing a guarantee, indemnity, security, charge or other arrangement that uses the resources of a SMSF or otherwise puts a SMSF’s resources at financial risk. 

Acquiring certain assets from members prohibited

Subject to specific exceptions, a trustee is prohibited from acquiring an asset from a related party of a SMSF. Exceptions include the acquisition of business real property and listed securities at market value.   

Probitions against borrowing

Subject to specific exceptions, a trustee must not borrow money or maintain an existing borrowing of money. The specific exceptions include borrowing money for:

  • payment of a benefit to a member; 
  • payment of a superannuation surcharge; 
  • covering settlement of securities transactions; and 
  • acquiring an asset pursuant to limited recourse borrowing arrangements. 

Investments must be made and maintained at arm's length basis

All investment dealings and transactions must be conducted on terms and conditions at arm’s length. In determining whether transactions are made on an arm’s length basis, the Regulator may consider whether the transaction can be replicated on the same terms with a different entity. 

Regulation of SMSF

If a trustee of a SMSF is found to contravene the Act, the Regulator may issue a notice of non-compliance. Receiving a notice of non-compliance has tax implications for SMSFs such as being taxed at the highest marginal tax rate (45%) rather than concessional tax rates (15%) applicable to SMSFs. 

The Regulator may seek a court order for a trustee to pay a civil penalty, up to a maximum of $220,000, for a contravention of the Act. Contraventions of the Act may, alternatively, be punishable by imprisonment of up to 5 years. 

Each trustee of a SMSF is required to maintain accounts and statements that records and explains transactions and the financial position of a SMSF. For each year of income, each trustee must also ensure the appointment of an approved SMSF auditor to audit the accounts and statements of a SMSF. The auditor is obliged to inform the Regulator, by lodging an auditor contravention report, if it forms an opinion that a SMSF has contravened, or may contravene, the Act or other statutory obligations.

Other records that trustees must keep are minutes of all meetings at which matters affecting the SMSF are considered and documents covering investment strategies of the SMSF having regard to the financial circumstances, needs and objectives of its members. 

Summary

If you have received, or intend to obtain, financial advice regarding the setting up or maintenance of a SMSF, as a trustee of a SMSF you are obliged to ensure that the SMSF complies with the Act and other relevant statutory requirements. Inappropriate financial advice may mean you risk contravening your statutory obligations.   

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