Involvement in an SMSF can put certain responsibilities in their trustees hands, and those who overlook important details or find themselves reported to the ATO for failing to fulfil those responsibilities may risk incurring financial, civil or criminal penalties.
As SMSFs often involve multiple members, the risk of non-compliance grows. You might be doing the right thing, but can you say the same thing about your fellow trustees?
That is why the role of the trustee should not be taken lightly as with greater control comes greater responsibility, should the administration of your SMSF go awry.
Make sure your retirement nest egg is protected by avoiding these common mistakes made by SMSF trustees.
Breaching The Sole Purpose Test
SMSFs must be maintained for the sole purpose of providing retirement benefits to your members (or for their dependents if a member dies before retirement). You will fail the test if a member gets any financial benefit through an investment, aside from increasing the return to your fund.
For example, a member’s personal use of a holiday house purchased by the fund, without making rental repayments, would breach the sole purpose test. The rules can become complex, which is why seeking professional advice may be wise. Trustees who breach the sole purpose test will lose their fund’s concessional tax treatment and could be liable for civil and criminal penalties.
Financial Assistance & Member Loans
Trustees can make the error of accessing their SMSF funds at will instead of following strict super laws. You cannot access your SMSF bank account to give financial assistance or loans to members or members’ relatives, improve your cash flow, repay debts or make personal investments. There have also been reports of withdrawals from SMSFs accidentally on mobile banking apps. Avoid ATO sanctions and keep your bank accounts separate to ensure no premature withdrawals are made from your SMSF account.
Failing To Lodge Paperwork On TIme
SMSF trustees must comply with demanding reporting and recordkeeping requirements. Your SMSF will have an annual audit. Failure to produce certain documents or make the deadline date will result in your SMSF being reported to the ATO. It is crucial to keep accurate records of all decisions and transactions should the ATO take an interest in your SMSF. A financial advisor may be helpful to take the stress out of keeping on top of your paperwork.
Not Planning For The Death Of Another Member
The death or illness of a member of your SMSF can have devastating effects on your retirement savings if you are not prepared. Dependency on one member to administer the SMSF can destabilise the fund if they pass away. Ensure that responsibilities are evenly distributed, if necessary, and that there is a clear understanding of the processes of the SMSF.
Go further than taking out life insurance policies and take the following precautions:
- Educate all of the members on the basic rules and strategies of your SMSF
- Employ an accessible financial advisor to answer any questions you may have about it, and to ensure that you remain compliant.
- Allow access to passwords and account numbers for all members
- Regularly review your binding death benefit nominations
- Know the processes of your SMSF, and be aware of the responsibilities of the trustees.