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A few basic rules will help avoid problems with your SMSF, writes Max Newnham.

Although running your own self-managed super fund (SMSF) is not difficult, there are a number of rules that trustees must be aware of. The main thing to remember is that although the money in the super fund is yours, unless you have met a condition of release, it isn’t yours yet.

The biggest sin a trustee of an SMSF can commit is allowing incorrect access to superannuation. In addition, there are a number of other mistakes that can be made. Where the Australian Taxation Office finds repeated flouting of the superannuation rules, it can make an SMSF non-complying. When this occurs, it takes 46.5 per cent of the fund as a penalty tax.

The ATO publishes information about what are the most common contraventions of super regulations committed by trustees.

These contraventions can be avoided by obeying seven golden rules of superannuation:

1. Superannuation must be used for retirement;
2. Assets of the fund must be kept separate from other assets;
3. Ensure you have an investment strategy in writing;
4. Only accept allowable contributions;
5. Do not provide financial assistance to members;
6. Do not purchase prohibited investments; and
7. Only borrow funds in extremely limited circumstances.

The first golden rule is also known as the sole-purpose test. To pass this test, you must be able to show that your SMSF is only used for the purpose of retirement. A member cannot gain access to their superannuation unless they have met a condition of release.

The main way a person meets a condition of release is to reach preservation age and retire. Until this happens, a member’s superannuation is preserved and cannot be accessed in most cases. Preservation age ranges from 55 for those born before July 1, 1961, and increases in yearly increments up to 60 for those people born after June 30, 1964.

Once a person reaches preservation age, there are different tests that must be passed to be classed as retired. These conditions differ depending on a person’s age. For people aged 55 to 59, retirement occurs when they cease employment and do not intend to work for more than 10 hours a week.

People aged from 60 to 64 only have to cease employment, as a result of either resigning, being fired or being made redundant, to pass the retirement test. Members who reach 65 have unfettered access to their superannuation.

The other conditions of release for accessing super, which are very strict and can limit how much can be taken, include death, having a terminal medical condition, being totally and permanently disabled, and severe financial hardship.

The second golden rule requires trustees to keep investments in a super fund separate and distinct from member’s assets. This rule is important to make sure that income from personal investments is not banked as super fund income and investments of the super fund are not incorrectly used by members.

One area where trustees of an SMSF can get into difficulty relates to receiving super contributions. Once a member is 65 or older they cannot make contributions to the super fund unless they have worked for 40 hours in 30 consecutive days in the financial year the contribution is made.

Golden rule No.5 is really a continuation of golden rule No.1. As superannuation is meant to be purely to provide retirement benefits, providing loans or other assistance to members is banned.

Although the trustees of an SMSF have a wide choice in what they can invest in, they can only buy investments from members in very limited circumstances. These include business real property, such as a factory or office, or publicly listed investments such as shares.

The final golden rule prohibits super funds from borrowing unless it is for less than 90 days to pay out a member’s benefits, for the purchase of an investment with a loan that is less than seven days and when a super fund meets the instalment warrant loan requirements.

In the final analysis, as long as trustees of an SMSF keep in mind that their super fund is meant to provide retirement benefits and nothing else, can’t get into too much trouble.


Posted by Max Newham – Fairfax Money Manager on 30th May, 2012