Need to Know

SMSF Explained

David Morgan, Legal Advisory

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A Self managed superannuation fund (“SMSF”) is regulated by the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”). Trustees of SMSF’s hold a significant proportion of total superannuation assets.

A SMSF must comply with the definition of that term in section 17A of the SIS Act. Therefore the fund’s members must not exceed four and all members must be either trustees or directors of a corporate trustee. No member of the fund may be an employee of another member, unless those members are relatives. (There is an extended meaning of “employee” in certain circumstances – see section 17A(6) for details). No director of a corporate trustee (and no trustee) may receive any remuneration from the fund or from any person (including the corporate trustee) for any duties or services performed by the director in relation to the fund (or performed by the trustee, in the case of individual trustees). There are provisions in the Act dealing with a deceased member/trustee (section 17A(3) of the SIS Act) where death benefits have not commenced to be paid and where a member is under age. A corporate trustee may have only one director if that person is also the sole member of the fund. A sole member fund must have two trustees if it does not have a corporate trustee. The other trustee must be a relative of the member or the other trustee must not be an employer of the trustee who is a member. A corporate trustee is preferred to individual trustees.

Non-compliance with the SIS Act may result in the SMSF being a non-complying fund and assessed at non-concessional tax rates and with other adverse tax consequences.

On establishment, the SMSF must elect to become a regulated fund with the Australian Taxation Office. This election as a regulated fund is essential if tax concessions are to be enjoyed. The most common form of establishment is by the execution of a trust deed known in the SIS Act as the Governing Rules of the SMSF. It is also necessary for a member or the member’s employer to make a payment to the Trustee as a contribution to the SMSF for the fund to be properly established.

"It is important that the Trustee acts within its power and avoid potential adverse tax consequences, litigation or civil and criminal actions.”

The Governing Rules provide the trustee with a broad range of powers consistent with the SIS Act. These powers permit the Trustee to invest in property, enter into borrowing arrangements, open and operate accounts with financial institutions, to accept contributions, pay benefits and amend the Governing Rules. It is important that the Trustee acts within its power and avoid potential adverse tax consequences, litigation or civil and criminal actions that may arise if the administration of the fund is not carried out as required by law. 

As superannuation laws are often amended, it is common practice for the Governing Rules of the fund to be updated where legislative changes have been introduced in order to ensure that the Governing Rules are consistent with the SIS Act.

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