Self-managed superannuation funds (SMSF) are increasingly becoming popular for many Australians who want to take control of their own retirement savings.

Before planning and setting up your SMSF, you will need to familiarise yourself first with the regulations and law governing the superannuation to avoid any potential breaches to the law.

What law governs SMSFs?

SMSF is governed by the Superannuation Industry (Supervision) Act 1993, which is commonly referred as the SIS Act.

The SIS act sets out the minimum standards and rules that must be followed by all superannuation funds, including SMSFs. It covers the management and administration of funds, duties and responsibilities of trustees, and the reporting and disclosure requirements.

How SMSFs are regulated

SMSFs deal with two key government agencies: Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC).

In a nutshell, ATO acts as the key regulator for SMSFs, administering the relevant super laws. It is responsible for:

  • Checking that the fund is managed in accordance with super laws.
  • Implementing and maintaining systems to check the legal compliance.
  • Enforcing action when there is a breach of the law.
  • Ensuring that SMSF auditors’ performance is up to the required standard.
  • Providing information to help set up and manage the fund.
  • Verifying the primary purpose of the fund.
  • Assessing applications for early release of super on compassionate grounds.

Meanwhile, ASIC covers the investments and insurance portions of setting up an SMSF. ATO assist ASIC by providing SMSF data to assist superannuation sector analysis.

The two regulators also collaborate to develop publication and guidance material catered to SMSFs.

ATO also make referrals to ASIC in times when there are potentially unlicensed advice providers or SMSF auditors who are unable to meet their obligations.

What are the rules in setting up an SMSF?

An SMSF can have up to six trustees — anyone over 18 can be one, as long as they have not been convicted of an offence involving dishonesty or have been the subject of a civil penalty.

Trustees are responsible for properly managing the fund and ensuring that it is compliant with tax and legal laws.

Once you have obtained a trust deed, you will need to register your fund with the ATO to be recognised as a regulated fund. Once registered, the fund will be made eligible for that great concessional tax rate.

Find out more about setting up your SMSF in this guide.

What are the investment rules in SMSF?

There are some rules you will need to take note of when you start using your SMSF to invest.

Passing the sole purpose test

SMSFs must comply with the sole purpose test, which ensures that investments the fund make are for the purpose of providing benefits to members upon their retirement.

The sole purpose test actually applies to all super funds. As long as the transactions of the SMSF are to the benefit of the members, then it passes the sole purpose test.

Separation of assets

You must ensure that the assets of the fund are kept separate from the personal assets of members. All assets that the SMSF acquires must be in the name of the fund, not in your or in any members’ name. With this, the SMSF must have its own bank account.

Arm’s length rule

All investments your SMSF makes must be made on a commercial arm’s length basis — this means that the purchase and sale price of the assets must always reflect true market value while income must show a true market rate of return.

You are not allowed to buy assets from or lend money to fund members and other related parties. However, there are exceptions.

For instance, a listed security like shares, units, or bonds listed on an approved stock exchange can be purchased by the fund, if it is acquired at market value.

The arm’s length rule is designed to ensure that you get appropriate returns on the fund’s investment, protecting your retirement benefits and ensuring that the value of the SMSF assets remains aligned.

Early access of benefits

SMSF trustees are prohibited from lending money or giving any financial assistance using the resources of the fund to members and their relatives. Such will be considered early access, which would be illegal unless the trustee already meets the conditions for an early release.

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