Superannuation is a savings arrangement where employers, employees, people who are self employed and others contribute to a trust fund which holds and invests the contributions made throughout a member’s working life in order to provide benefits upon their retirement.

Self managed superannuation funds perform this function in a similar way to publicly available retirement savings vehicles, with the main difference being that the members of the fund are also required to be the trustees of the fund. The effect of this requirement is that the members control the way in which their contributions are invested.

More specifically, in order for a fund to satisfy the requirements of being a self managed superannuation fund, the fund must:

  • have a deed that conforms with superannuation legislation;
  • have four members or less;
  • comply with the requirements in relation to members being trustees;
  • no members of the fund are employees of another member of the fund, unless those members are related; and,
  • no member of the fund receives remuneration for his or her services as trustee.

The main advantages that are attributed to self managed funds over public offer funds are increased investment freedom and greater control over superannuation savings.

The Trust DeedThe fund’s trust deed outlines a number of important aspects about its operation. Some of these aspects include:

  • details of who the trustees are;
  • the process of appointing and removing trustees;
  • the powers of the trustees;
  • eligibility for membership of the fund;
  • conditions relating to the fund’s acceptance of contributions;
  • conditions relating to the fund’s payment of benefits to members and their beneficiaries in the event of the death of a member; and,
  • the procedures for varying the provisions of, or winding up, the fund.

The superannuation legislation imposes certain covenants which are deemed to be included in the deeds of all regulated funds and which reflect fiduciary duties implicit in trust law. These duties require trustees to:

  • act honestly, and prudently in all matters;
  • exercise the same degree of skill, care and diligence as an ordinary person;
  • act in the best interests of fund members;
  • quarantine the assets of the fund from non-fund assets;
  • retain control over the fund;
  • implement and adhere to an investment strategy; and,
  • allow members access to relevant fund information.

Many of the clauses within the trust deed will mirror those in legislation such as the Superannuation Industry (Supervision) Act and Regulations, but to the extent of any inconsistency between the legislation and the deed, the statutory requirements will prevail.

Membership and Trustee structureThere is a broadly stately requirement, that all members be trustees, or a director of a corporate trustee, which ensures that each member is fully involved and has the opportunity to participate and make decisions about the fund.Specifically, the fund is required under the SIS Act:

  • to have four members or less;
  • each member is a trustee, or director of a corporate trustee;
  • no members of the fund are employees of another member of the fund, unless those members are related; and,
  • no trustee, or director of the corporate trustee, receives remuneration for his or her services as trustee.

Where a fund has only one member, there is a requirement for a corporate trustee with the member being the either the sole director, or have a second director who is a relative or not employed by the member. Alternatively, if a sole member fund did not wish to appoint a corporate trustee, two individual trustees could be appointed where the second trustee was either a relative of the member trustee or not employed by the member.

It is important to note that certain persons are disqualified from acting as trustees, these will include:

  • persons who have ever been convicted of an offence involving dishonesty;
  • persons who have ever been convicted of a civil penalty offence under the SIS Act;
  • persons who are insolvent or under administration, or in the case of a corporate trustee, a receiver, official manager, or provisional liquidator has been appointed; and,
  • persons who are undischarged bankrupts, or in the case of a corporate trustee, action has been commenced to wind up the company

Minors, those persons under the age of 18, are considered to be under a legal disability and accordingly, are unable to be appointed as trustees of a self managed fund. Where contributions are made on behalf of minors, a parent, guardian or legal personal representative would ordinarily be required to act as trustee on their behalf.

Trustee requirementsWhilst often an accountant, lawyer or financial adviser will assist with the establishment and operation of a self managed superannuation fund, it is the trustees responsibility to ensure that all of the fund’s legal requirements have been satisfied, there are significant penalties that may be imposed on trustees who fail to properly perform their duties.The main legal requirements are:

  • to comply with the sole purpose test;
  • to only accept contributions from members in accordance with the SIS Act;
  • to manage the funds investments;
  • to only pay benefits in accordance with the rules;
  • to comply with administrative obligations; and,
  • to comply with the investment restrictions.

A broad overview of the first five of these requirements follows, with a more in-depth overview of the investment restrictions in the next section.

The Sole Purpose testRequires that the fund is maintained for the purpose of providing benefits to members upon their retirement, or their dependents if a member dies before retirement.
The Contribution StandardsAre designed to ensure that contributions are made for retirement purposes only and also require trustees to allocate contributions to member accounts within 28 days after the end of the month in which they are received.
Managing the funds’ InvestmentsThe trustees are required to formulate and adhere to an investment strategy which takes into account the risk, return, diversification and the liquidity of investments that the fund intends to hold. The investment strategy is required to outline the investment objectives of the fund together with the methods that the trustees will adopt to achieve those objectives, and should reflect the purpose and circumstances of the fund. Trustees should be able to demonstrate that these matters have been formally considered by way of minutes or other similar fund documentation.
Benefit payment standardsThe payment standards and preservation requirements ensure that fund monies are only paid to members in appropriate circumstances.
Administrative requirements in maintaining a fundThese include:

  • the preparation and retention of accurate accounting and administrative records for the fund; appointing an auditor and ensuring that the fund has an audit completed each year;
  • lodging a fund income tax and regulatory return and payment of the supervisory levy to the ATO annually;
  • lodging Superannuation Contribution Statements outlining the contributions made to the fund each year; and, complying with benefit payment reporting obligations.

In the event that the trustees fail to comply with any of the aforementioned requirements of the SIS Act, the trustees are at risk of disqualification from being a trustee, prosecution, penalties and the fund being made non-complying, which could result in the loss of the cumulative tax concessions.

Investment restrictionsTrustees are required to make investment decisions about the fund for the benefit of all members. It is important to note that there are severe penalties for trustees who misuse the fund’s superannuation benefits and who do not comply with the relevant legislation.Whilst superannuation laws don’t prescribe the types of investments that trustees can invest in, there are investment restrictions which aim to protect the members from being exposed to undue risks, such as the failure of a business operated by a member, and ensure that investment decisions of the trustees are consistent with the sole purpose of generating retirement benefits for members.Some of the main investment restrictions include:

  • a prohibition on lending to or providing financial assistance to members;
  • a prohibition on acquiring certain assets from related parties.
An overview of these restrictions followsThe prohibition on lending or providing financial assistance to membersThis prohibition on lending is fairly self explanatory, and similarly, circumstances such as allowing the fund assets to be used to guarantee personal loans would also result in a breach of the investment restrictions.The prohibition on acquiring certain assets from related parties

Trustees are generally prohibited from acquiring investments from related parties, with the two main exceptions, being listed securities, such as shares, and property which satisfies the definition of ‘business real property’. The exception in both of these circumstances only applies if the asset is acquired from the related party at market value.

It is also important to note that trustees are required to ensure that the ownership of the assets of the fund is assured i.e. in a legally recognised ownership arrangement. This ordinarily involves having the title to assets in the name of the trustee, or trustees, duly noted as being held on behalf of the fund.

Interaction with the Regulator, consequences of breaching the lawThe Regulator of self managed superannuation funds is the Australian Taxation Office.The ATO have indicated that where trustees are making a genuine effort to meet their obligations they will attempt to work with trustees to rectify the situation however, they will take a firm approach with trustees who fail to make a genuine effort or set out to deliberately avoid meeting their legal obligations.Where breaches are not satisfactorily rectified, trustees can expect the Regulator to be progressively more rigorous and severe in applying penalties, particularly where the breaches are deliberate, repeated or reckless.

The penalties that can be imposed include:

  • obtaining an undertaking from the trustees to rectify the breach;
  • freezing the assets of the fund where they are considered to be at risk of being eroded;
  • suspending or removing trustees and disqualifying them from acting as a trustee of a fund in the future;
  • rendering the fund non-complying, which results in harsh tax consequences; and

 

 

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