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What are the biggest compliance blunders investors make when setting up an SMSF?

For those looking at planning for their retirement, an SMSF may seem like an appealing option. Rather than trusting the investment decisions to a public offer fund, you get to make your own decisions, and tailor your investment strategy to your own retirement needs and goals. Further, how much you spend on administration and running costs is up to you.

However, self-managed doesn’t translate to ‘it’s your money, do what you like with it’. To be eligible for the tax concessions that attract so many to the SMSF environment, you have to elect to be a regulated fund. This term has special meaning within the legislation, and that means ensuring compliance with the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) at all times.

Here’s a short list of common compliance blunders that we see investors make when they’re setting up an SMSF. Thankfully, all of them can be easily avoided, which will save you money and hassle in the long run.

  1. Execution of documents

So you’ve spoken to your accountant and financial planner and you’ve engaged a legal practitioner to draft the deed for your new SMSF.

It’s important to remember that in order to be binding at common law, a deed must meet the following requirements:

  • it must be written on paper, parchment or vellum;
  • it must be sealed; and
  • it must be delivered.

Sealing: Sealing is generally no longer literally needed in Australia. However, the position regarding sealing varies significantly. For example, in NSW if a deed is expressed to be a deed (eg, it says ‘executed as a deed’), it is taken to be sealed. In Victoria, this is not sufficient, rather the words ‘signed, sealed and delivered’ (or similar wording) are needed.

We see many deeds that do not contain the words ‘signed, sealed and delivered’ – rather they just provide ‘executed a deed’ above the execution clauses. This alone is not sufficient.

Witnessing: At common law there is no requirement for witnessing. However, certain states and territories have passed legislation requiring a deed to be witnesses. In NSW, for example, an individual executing a deed must be witnessed, and the witness cannot be a party to the deed. We have seen many deeds witnessed by parties to the deed (for example, trustees witnessing each other’s signatures), which would not meet the witnessing requirements in NSW.

Stamping: Stamping of SMSF deeds is not required in most jurisdictions; however, the SMSF deed established in the Northern Territory and Tasmania must be stamped at their respective state revenue offices. Check with your legal practitioner as to stamping procedures.

Companies: If your SMSF has a corporate trustee, the Corporations Act 2001 (Cth) governs the requirements where a company executes a deed, and the above discussion does not apply. Rather, for companies, under s 127, a document will be a deed, so long as it is expressed to be executed as a deed and it is signed by two directors, a director and a secretary or for a company that has a sole director who is also the sole secretary – that director.

The Corporations Act 2001 (Cth) does not cover a sole director who is not a secretary. Therefore, it is always best practice to also have a secretary.

Key points:

  • Make sure your legal practitioner has drafted the deed according to your jurisdiction and has advised you to execute accordingly.
  • If you have a corporate trustee, make sure the company executes the deed pursuant to s 127 Corporations Act 2001 (Cth).
  • Keep the original executed deed and copies in a safe place. Keeping a scanned, digital version of the executed deed is also a good idea.
  1. Disqualified person

Before deciding to start an SMSF, prospective members should make sure they are not prohibited from being a trustee of an SMSF. One of the key features of an SMSF is that all members must be trustees (if individual trustees), or all members must be directors of the trustee company (if the SMSF has a corporate trustee). Anyone age 18 or more can be an SMSF trustee as long as they are not under a legal disability (such as mental incapacity) or a disqualified person.

A person is disqualified if they:

  • have been convicted of an offence involving dishonesty;
  • have been subject to a civil penalty order under superannuation law;
  • are insolvent under administration (including being an undischarged bankrupt); or
  • have been disqualified by a court or regulator (for example, by the ATO or APRA).

If you decide to have a corporate trustee for your SMSF, it’s a good idea to incorporate a new, sole purpose company (ie, its only purpose is to act as trustee for your SMSF). Aside from being cleaner and ensuring that the SMSF doesn’t inherit any unwanted liability from the company’s previous incarnation, this will ensure that the company isn’t prevented from acting as a trustee of an SMSF.

A company can't be a trustee if:

  • a director or other responsible officer of the company (such as a secretary or executive officer) is a disqualified person;
  • a receiver, official manager or provisional liquidator has been appointed to the company; or
  • action has started to wind up the company.

Key points:

  • Make sure all potential members are not disqualified persons prior to establishing your SMSF.
  • Register a new company to act as corporate trustee rather than ‘recycling’ an old company.
  1. Opening a bank account

One of the trustee’s key duties in an SMSF context is to keep the SMSF’s affairs separate and make sound investments. Again, the ‘it’s my money, I can do what I like with it’ illusion can lead to compliance blunders where trustees mix their own personal funds with money belonging to the SMSF.

The easiest way to avoid this issue is to open a bank account in the name of the trustee for the SMSF, eg, ‘Super Fund Savings Pty Ltd ATF RJPB Super Fund’ at the same time as establishing the SMSF.

A bank account is needed to manage the SMSF’s operations and accept cash contributions, rollovers of superannuation and income from investments. This account is also used to pay the SMSF’s expenses and liabilities.

You don't have to open a separate bank account for each member but you must keep a separate record of their entitlement, which is called a 'member account'. Each member account shows:

  • contributions made by or on behalf of the member;
  • investment earnings allocated to them; and
  • payments of any super benefits (lump sums or income streams).

This will also make it much easier for the SMSF auditor to audit the SMSF, and when lodging the SMSF’s tax return each year.

Key points:

  • Keep personal funds separate from SMSF funds at all times.
  • Open a dedicated bank account for the SMSF at the same time as starting the SMSF.

Therefore, while there may be a number of benefits associated with running your own SMSF, depending on your circumstances, it is crucial that the SMSF is established correctly from the outset to ensure the SMSF complies with superannuation law requirements.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

 By Philippa Briglia, lawyer, DBA Lawyers and Rebecca James, special counsel, DBA Lawyers

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