Running an SMSF: Key Responsibilities and Pitfalls to Avoid
Self-Managed Super Funds (SMSFs) offer Australians the opportunity to take control of their retirement savings. While the autonomy and flexibility of managing your own super can be appealing, it comes with a significant set of responsibilities and potential pitfalls. This article explores the key responsibilities of SMSF trustees and common pitfalls to avoid to ensure your SMSF is compliant and effective.
Key Responsibilities of SMSF Trustees
1. Legal Compliance
SMSF trustees are required to comply with a range of legislative and regulatory requirements, including:
- Superannuation Industry (Supervision) Act 1993 (SIS Act)
- Superannuation Industry (Supervision) Regulations 1994
- Income Tax Assessment Act 1997
- Corporations Act 2001
- Tax Administration Act 1953
Trustees must ensure that the SMSF operates in accordance with its trust deed and the law. This includes maintaining the fund for the sole purpose of providing retirement benefits to members or their dependents, known as the sole purpose test.
2. Investment Strategy
Trustees must develop, implement, and regularly review an investment strategy that aligns with the fund’s objectives and risk tolerance. This strategy should consider:
- Risk and return of investments
- Diversification
- Liquidity
- Ability to discharge existing and prospective liabilities
- Insurance needs of the members
3. Record Keeping and Administration
Maintaining accurate records is crucial for SMSF compliance. Trustees must keep:
- Financial records for at least five years
- Minutes of trustee meetings and decisions for at least ten years
- Records of changes to trustees and trustee declarations
Additionally, trustees must ensure the fund is audited annually by an approved SMSF auditor.
4. Reporting and Lodging Returns
Trustees are responsible for lodging the SMSF’s annual return with the Australian Taxation Office (ATO) and paying any associated taxes. They must also report any regulatory breaches to the ATO.
Common Pitfalls to Avoid
1. Inadequate Knowledge and Expertise
Running an SMSF requires a solid understanding of financial and legal principles. Trustees must stay informed about changes in superannuation and tax laws to avoid inadvertent breaches. Seeking advice from financial advisers, accountants, and legal professionals is highly recommended.
2. Ignoring Costs
SMSFs can be expensive to set up and maintain. Costs include investment fees, accounting, auditing, tax advice, legal fees, and insurance premiums. According to MoneySmart, the average operating cost of an SMSF in 2019 was $6,450, while the median cost was $4,069. Trustees must ensure that the benefits outweigh these costs.
3. Poor Investment Decisions
One of the most common pitfalls is making poor investment decisions. Trustees must avoid:
- Over-concentration in a single asset class
- Investing in assets that do not meet the sole purpose test
- Failing to benchmark returns against market performance
4. Illegal Early Access
Accessing superannuation funds before reaching the preservation age or without meeting a condition of release is illegal and can result in severe penalties. The ATO closely monitors SMSFs for illegal early access, and trustees found in breach can face significant fines and disqualification.
5. Inadequate Documentation
Failure to maintain thorough records can lead to compliance issues. Trustees must document all decisions, keep financial records, and ensure that all transactions are transparent and traceable. Proper documentation is essential for audits and resolving disputes.
6. Relationship Breakdowns
SMSFs with multiple members can face challenges if there is a relationship breakdown, such as a divorce or a falling out between business partners. Trustees must have strategies in place to manage such situations, including clear exit strategies and death benefit nominations.
Running an SMSF can be rewarding, offering greater control over your retirement savings. However, it is not without its challenges and responsibilities. Trustees must be diligent in complying with legal requirements, maintaining accurate records, and making informed investment decisions. By avoiding common pitfalls and seeking professional advice when necessary, you can effectively manage your SMSF and secure a financially stable retirement.
For more detailed guidance, consider consulting the ATO’s resources and seeking advice from licensed financial professionals.