Navigating the Legal Landscape: Responsibilities of SMSF Trustees
Understanding the Legislative Framework and Compliance Obligations for Self-Managed Super Funds
As a trustee of a self-managed super fund (SMSF) there are responsibilities and rules you must follow. At the most fundamental level, you need to make sure your SMSF is functioning under the relevant laws.
As a type of superannuation fund, trustees need to understand the overriding legislation for SMSFs is the Superannuation Industry (Supervision) Act 1993 – also known as the SIS Act.
SMSFs also pay tax as there are many sections of the Income Tax Assessment Act 1997 (ITAA ’97) that apply only to super funds.
As SMSFs are a form of trust the general law of trusts will apply and if your fund has a corporate trustee structure, then the Corporations Act 2001 also needs to be considered.
These Acts can be very complex and detailed but trustees should be familiar with the law, so they don’t contravene their requirements as SMSF trustees.
The SIS Act defines an SMSF and who can be a member.
It explains how an SMSF needs to operate and how it needs to be administered. But perhaps the most important part of the Act for trustees to familiarise themselves with and keep in mind is the sole purpose test.
The sole purpose test requires each trustee of a regulated super fund to ensure that the fund is maintained solely for one or more of five core purposes. The Act also details ancillary purposes for which super funds can be maintained but these are in addition to one or more of the core purposes.
The SIS Act also stipulates the number of penalty units SMSF trustees may incur for breaches. Some fines are imposed by the Australian Taxation Office (ATO) for breaches of the legislation. Civil and criminal penalties can also be imposed by the courts for contraventions of the SIS Act; the more severe contraventions involve in-house assets and lending to members and relatives.
Governing rules for SMSFs, such as what needs to be included in an investment strategy, along with administration obligations, such as audit requirements and annual tax returns, are also included in the SIS Act.
The annual tax return for an SMSF is the fund’s tax return combined with an annual member contributions statement as required under the Taxation Administration Act 1953.
Income Tax Assessment Act 1997
SMSFs are required to pay tax like other taxpaying entities under the requirements of the Income Tax Assessment Act 1997. As complying super funds, tax rates will be much lower – generally 15 per cent for before-tax contributions and on earnings.
Depending on whether some or all members are in retirement phase, Division 294 of the Act explains how income earned on balances supporting pensions will be treated for tax purposes, that is, tax free.
There will be other sections of this Act that may apply to SMSFs, such as general capital gains tax (CGT) provisions and deduction provisions. Division 295 defines non-arm’s length income for super funds and its tax treatment and modifies CGT provisions so that CGT is the primary code for calculating gains or losses for SMSFs.
General trust law/Trusts (Hague Convention) Act 1991
The Trusts (Hague Convention) Act 1991 specifies the laws applicable to trusts, including a self-managed super fund trust, and governs their recognition.
In addition, states have separate trustee acts that explain how trustees can be appointed for all trusts, including SMSFs, and their powers.
Corporations Act 2001
If your SMSF has a corporate trustee – that is, a company acting as trustee for the fund – then penalties will be enforced via the Corporations Act 2001. Effectively this means penalty units will be incurred by the company instead of each individual trustee – one of the main selling points of this kind of SMSF structure.
The Corporations Act’s financial services provisions, as they relate to the requirement for financial products to provide a product disclosure statements (PDS), are also relevant for SMSFs as they explain when they do, or don’t, have to provide a PDS to members.
The bottom line
There are hundreds, if not thousands, of Acts in Australia at both state and commonwealth level. Depending on what kind of SMSF you have, what it invests in and the make-up of the members, some of these laws may touch SMSFs in a secondary way.
So, don’t think that because something your SMSF is doing, or has done, doesn’t explicitly contravene superannuation or tax law, that it may not incur a penalty. The sole purpose test should be your initial guiding principal but, if in doubt, it may be better to seek legal advice.
Superannuation is one of those areas that can be compared to a cart on a rollercoaster. Its performance is constantly affected by the economic climate and shifting legislation that alters the benefits individuals and businesses can gain from superannuation funds. Read more here about how Omnis Group can help.
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