Running an SMSF
Running an SMSF
The responsibility of running an SMSF sits firmly on the shoulders of the trustees of the fund. The experience for trustees is very similar to that of owning a car. For some trustees their experience can be similar to a person who buys a car, has it fully maintained, and also has a chauffer who takes them where they want to go. These trustees have not much to do with the running of the fund and pay professionals to do it for them.
At the other end of the scale the trustees buy the car, do all of their own servicing, drive the car, and at times get advice on how to improve its performance. These trustees look after all aspects of running the fund. Unlike cars that only need a roadworthy when they are sold, SMSFs require a roadworthy in the form of an audit every year.
Administration of the Fund
Trustees can choose to do everything themselves (except the audit as this must be done by an independent auditor), they can have service providers do nearly all of the work, or they may do some of the work but get assistance when it comes to accounting and tax matters.
There has been an unfortunate tendency by some service providers to make the recordkeeping and documentation more complicated than is really necessary. In some cases this can be because the service provider has a professional belief that if things are not done in a certain way their clients could be at risk. In other cases the extra documentation prepared can be a bit of smoke and mirrors to help justify a high fee.
An example of this is when an SMSF goes from accumulation phase to pension phase. There are some service providers that not only prepare letters and minutes to evidence that a pension has started, they also prepare a deed of pension or separate pension document. The ATO only requires the minutes and letters and the extra documentation could be regarded as window dressing.
In the final analysis it is up to the trustees to fully understand all of different administration duties, and decide how much or how little they will do themselves.
In some ways having an SMSF is very similar to owning and running a small business, but with a higher standard of recordkeeping imposed. Just as is the case for small business owners, the more regularly financial statements are prepared, and checked against what should have happened from both a financial and a compliance perspective, the greater the control and benefits that will be obtained.
The duties of trustees can be broken down into different time periods reflecting how often work is done. What follows are those duties split into their frequency.
Trustee duties are as follows:
The day-to-day duties of trustees of an SMSF include the following:
- Receiving contributions, income, investment sale proceeds and rollovers.
- Making payments for investments, admin and compliance costs, benefits and rollovers.
- Completing documentation to make and sell investments.
- Keeping accurate accounting records that enable members’ benefit statements and other financial statements and reports to be completed.
- Preparing and keeping minutes of decisions made during the year that affect the SMSF, its members and the trustees.
- Filing and retaining all documentation relating to the investment and administration of the fund, including information received from other super funds about members’ benefits rolled into the fund.
This requirement to keep minutes is another area where some service providers take a minimalist approach, whereas others believe every decision made by trustees should be backed by a minute.
From a practical point of view a minute should not be required for every investment decision made by the trustees. To be on the safe side, the investment strategy minute for the fund could include a section that states: ‘The trustees are authorised to make all investments authorised by this strategy and no separate minute is required unless the investment involves a change in this investment strategy’.
In addition to these administrative requirements, trustees must also notify the ATO, on the appropriate form, within 28 days of changes to the following:
- the name of the fund
- the names of trustees
- the names of members
- the names of directors of a trustee company
- the postal or service of notices address of the fund
- the registered address of the fund.
If there is one area where trustees of an SMSF can decrease costs it is if they do their own bookkeeping and accounting. The number one rule in accounting is to make sure you balance and check your work as you go, and not leave it until the end. Imagine what a house would look like if checking measurements or dimensions were left till the end.
Often when well-meaning trustees try to do their own bookwork but without checking that it balances and is correct, it takes more time to find the errors than processing the whole year’s work from the start. So be warned: if you plan to do the bookkeeping yourself make sure you are balancing your work back to the bank account and other independent sources as you go.
Also, to keep your work to a minimum utilise direct payment and receipt facilities offered by your bank and the different fund managers and companies you invest in. In some cases there may be a small fee, but time is saved and the chance of banking or paying an amount using the wrong account is minimised.
The simplest and cheapest form of recordkeeping trustees can use is the cash book method. All that is needed is a multi-column book. Instead of using a pen, use a pencil to write in the information. If a transposition error or other mistake is made it is a lot easier to fix.
One section of the cash book is devoted to receipts and the other to payments. To assist in checking that your figures balance when you have more than one bank account, a separate sheet should be used for each account. Where a cash book combines several sources of receipts or payments the job of reconciling is made that much harder.
For receipts the columns across the page could be:
In addition to writing the income banked in the amount column it is also written in the relevant type of receipts column. Depending on the number of columns the cash book has you can break down the types of deposits even further if required. The ‘Other’ column can be used for less frequent deposits such as rollovers or for when investments are sold.
The secret of a cash book for a super fund is to make sure there are either enough columns or enough information shown in the detail column to enable contributions for each member to be calculated and income for each investment to be summarised.
For payments the columns across the page could be:
|Date||Detail||Amount||Fees & Charges||Professional fees||Investments||Other|
Just as with receipts the amount paid is written in the “Amount” column and the relevant payments column. Again if the cash book is big enough the investments could be broken up further into their different categories, and the ‘Other’ column is used for one-off payments such as for an updated trust deed.
If the cash book method appeals there is one doctrine of accounting that you must follow, almost above all others. That is the doctrine of consistency. This means that you treat deposits and payments the same way each time. In other words, record the same payments or receipts in the same column every time, and don’t change their treatment.
On a monthly or quarterly basis the amounts written for receipts and payments should be checked against a bank statement or a print out from an online banking service. The accuracy of the amounts shown will be checked. In addition, any direct payments such as charges, and direct deposits such as income transferred into the bank account, will be picked up and can be written in the relevant section.
The next step is to again either monthly or quarterly reconcile the total for receipts and payments shown in the cash book with the total shown by the bank or other financial institution. If the totals don’t agree there is a mistake that must be fixed before going on. In addition, the total received or paid for the period shown in the “Amount” column should agree with the combined total of each of the different receipts or payments columns.
This method of bookkeeping should provide an accurate summary for the fund’s accountant to process through his or her computer accounting system. It will also provide a means by which the trustees can relatively easily keep track of how the super fund is going income-wise, and more importantly keep a watch on how much is being contributed for each member so the limits are not breached.
If trustees can create more work for the fund’s accountant by not keeping an accurately reconciled cash book, they can create even bigger problems when they use a computer package incorrectly. Again the secret of doing this properly is to regularly check and reconcile as much as you can.
Some of the popular business software packages, such as QuickBooks , MYOB and Xero, can be used by trustees to process their financial information. These simple packages will enable the trustees, if the information is recorded accurately, to keep track of many more investments and different types of contributions and members than using a cash book.
One of the advantages of the more advanced packages is that they receive data feeds electronically directly from financial institutions such as banks. This means the level of bookwork required is reduced and the chance of processing errors is reduced.
The secret to an efficient computer accounting package is the way the different accounts are set up. A small cost at the very start, of getting the super fund’s accountant to help in setting up the accounts, can save greater ongoing costs and time than if the trustees try to do it all themselves.
These computer packages have the accounts divided into their main sections, these being income, expenses, current and non-current assets, current and non-current liabilities, and equity. Investments and bank accounts are set up in the assets section, income tax payable in the liabilities section, and members’ accounts in the equity section.
The costs of these packages range from around $400 up to $700. The more support, training and updates trustees need the greater the cost. The old adage about computers, ‘garbage in garbage out’, is applicable. These systems do require some basic understanding of finance and accounting, but for trustees who want to do as much as they can themselves, they can be a great help.
There are other computer accounting packages more specifically designed to do the accounting for an SMSF made available to accountants and other SMSf service providers. These packages not only look after the accounting side of an SMSF, such as the receipts and payments, they also help with the other duties and responsibilities of trustees of an SMSF. They can even automatically update the value of listed investments.
These packages are very sophisticated, to the point where they can:
- calculate taxable capital gains
- calculate tax payable by the fund
- calculate exempt pension income
- allocate income to members
- provide a comprehensive range of member and investment reports
Quarterly or half-yearly duties
It is good practice for trustees of an SMSF to prepare a full set of reconciled accounts during the year. If this means getting the fund’s accountant involved this may increase the administration costs for the fund. Offsetting the increased cost will be the ability of the trustees to more closely manage the investments of the trust, detect any compliance breaches in their very early stages, and take any corrective action required.
SMSFs registered for GST can be required to lodge quarterly BAS forms. If this is the case the trustees themselves, or the fund’s accountant, will need to prepare the relevant reconciled accounts to determine what the income and expenses for the quarter are, and what GST has been collected or paid. Large super funds with commercial properties will be the main types of SMSFs required to register for GST.
Where a fund is in pension phase, or at times of extreme instability in the financial markets, reviewing the results and financial position of the fund can also provide major benefits. For a fund in pension phase a check can be done to ensure there will be sufficient cash to meet the future pension payments and any other payments to be made by the fund.
The secret to preparing fully reconciled accounts is the checking. First, trustees must ensure all of the day-to-day accounting entries have produced results in the accounts that can be verified. The sources of verification are bank statements, dividend notices and investment statements issued by fund managers.
The other checking involves looking at what transactions have occurred and ensuring everything is within the duties and responsibilities of the trustees, such things as ensuring all investments purchased are within the rules and the investment strategy of the fund. Also a check can be made of the amounts of concessional and non-concessional contributions to ensure the limits are not exceeded.
One of the main yearly duties of the trustees is to get all of the super fund’s information together so the end-of-year statements and forms can be prepared. These include, where the trustees have not been maintaining a fully reconciled ledger system for the fund themselves, getting together all of the information the fund’s accountant will need to do this work.
That information can include:
- bank statements
- dividend statements
- purchase documents for new investments
- tax statements and end-of-year reports for managed funds
- rental statements if the fund owns investment property.
Trustees of an SMSF should be particularly careful to provide all of the information needed for the accounts to be prepared and the audit conducted. Where trustees delay providing information to the auditor of the fund they will have breached the operating duties of a trustee. In this case they can find the breach is reported to the ATO, which could result in them and their fund receiving some unwanted attention from the ATO.
Once the yearly accounts are done, the trustees, the fund’s accountant or a service provider must prepare the following statements and forms:
- statement of income and expenditure
- statement of financial position
- members’ statements
- income tax return
- members’ contribution statements.
As part of preparing the annual accounts for an SMSF, and also at times when a pension starts or a member requests benefits be paid out, the investments should all be shown at their current market value. For share, fixed-interest and managed fund investments the annual market value will be easily obtained. For other investments, such as property or collectables, the job of ascertaining the current market value is harder.
Trustees can obtain valuations from a qualified valuer, from suitably experienced real estate agents or experts in the investment, or calculate their own valuation based on available and supportable data.
The ATO does not require trustees of an SMSF to obtain a written valuation every year for investments where they can demonstrate that the market for that investment has been relatively stable and no adverse events, such as being damaged, have occured.
The trustees of an SMSF, in addition to the foregoing, must also on an annual basis:
- review the investment strategy of the fund and decide what it will be for the next 12 months
- appoint an approved auditor for the fund
- where the fund is in pension phase, ensure there will be sufficient cash in the bank account, or that the income of the fund when combined with the cash will be sufficient, to pay the pensions for the next 12 months.
Paying SMSF expenses
Among the administrative duties of SMSF trustees is the requirement to pay fund expenses. These expenses include all of the operating costs of the fund and those associated with the investments of the fund. SMSF trustees cannot be paid for their work done as trustees.
Trustees can however be paid by the SMSF for work done for which they are properly qualified and experienced. For example an accountant that specialises in preparing SMSF accounts and tax returns could be paid, as long as the fee is commercial, for preparing the accounts and tax return for their own fund.
All expenses related to the operation of an SMSF should preferably be paid directly from the SMSF’s bank account rather than paid by trustee/members. This is because in some circumstances amounts paid on behalf of the fund by members can be classed as a non-concessional contribution.
It is interesting to note that the ATO has warned SMSF trustees not to pay expenses on behalf of their SMSF, because it can lead to an excess non-concessional contribution problem, when superannuation legislation allows SMSFs to reimburse trustees for expenses they have incurred on behalf of their fund.
When a trustee of a fund does pay an expense on behalf of the SMSF it is important that, to avoid the chances of the payment being classed as a non-concessional contribution, the SMSF reimburses the trustee as soon as possible.
Some of the expenses that can be paid by an SMSF include:
- accounting fees
- audit fees
- legal fees
- investment advice fees
- investment valuation fees
- the annual return fee for corporate trustee
- travel costs for a trustee inspecting an SMSF investment
- office supplies
- life insurance for members
- property investment expenses
- subscriptions to investment magazines used by trustees to assist in the investment activities of the fund, and
- membership fees for the SMSF Survival Centre.
Care does need to be taken with expenses that have a dual purpose. For example if an SMSF pays for all of the paper and servicing costs of a printer, which is also used by the members for their personal or business activities, this would not be fair or reasonable. In addition the auditor of the SMSF could regard this as a breach of the regulations relating to members obtaining an immediate benefit.
For expenses that have a dual purpose between an SMSF and the members some form of a record should be kept to ascertain what percentage of the expense relates to the SMSF, and what percentage relates to the members. The SMSF would then be entitled to pay its share of the expenses.
If the trustees of an SMSF use an office in the member’s home for long periods in performing their duties it would not be unreasonable, as long as adequate records are kept to establish how many hours of SMSF work is done in the office, for the fund to pay something towards the cost of power, light and heating of the office.
When a trustee is in doubt as to whether an expense should or can be paid by the SMSF there are two options:
- Contact the accountant for the fund and ask them.
- Contact the auditor for the fund and ask them.
The trustees of an SMSF must have a meeting or pass a resolution at least once a year. At the annual meeting, or in the annual resolution, the accounts for the fund are approved and any matters needing action, such as the investment strategy, are addressed.
Other meetings and resolutions that may be required during the year include:
- actioning a member’s request to receive a benefit payment
- actioning a member’s request to start a pension
- dealing with a request by a member to roll over benefits
- addressing changes in trustees, both individual and corporate
- changing the investment strategy for the fund.
Binding Death Benefit Nominations
Where the trust deed of an SMSF allows, members can lodge a binding death benefit nomination form with themselves as trustees. You might ask, if all members are trustees what is the point of this? There can be a situation where, in the absence of a binding death benefit nomination, the remaining trustee/members can pay the benefits to themselves and not to those people the deceased member wanted.
There is a celebrated legal case involving an SMSF that not only demonstrates the necessity of having binding death benefit nominations, but also to make sure the trusteeship upon the death of the last member passes to someone that will respect the wishes of the deceased member.
In the case in question an SMSF was set up by a husband and wife. After the wife died the couple’s daughters was appointed as the second trustee. The father then completed a non-binding death benefit nomination stipulating that the benefits were to be paid equally between his daughter and son.
After the death of the father the daughter appointed her husband as the second trustee and then paid the entire death benefit to herself. The son challenged the ability of his sister to take all of the superannuation but lost the case and received no benefit from the fund.
For a binding death benefit nomination to force the trustees of an SMSF to pay the benefits to the nominated person or people, it must be in writing and must meet the following conditions:
- it must be signed and dated by the member in the presence of two adult witnesses that are not named as beneficiaries of the nomination
- the notice must contain a declaration by the witnesses that states it was signed by the member in their presence
- each person to benefit from the nomination must be a legal personal representative or dependant of the member
- the allocation of the member’s benefit to the nominated beneficiaries is clear
- the notice is not older than three years at the date of the member’s death (Unless it is an SMSF).
Binding death benefit nominations can be withdrawn or altered by a member at any time. Trustee/Members of an SMSF who want to ensure their wishes are acted on after they die should ensure they put in place a binding death benefit nomination.
There is some controversy over whether the nomination can be a non-lapsing binding death benefit nomination or a nomination that must be redone every three years. The ATO as umpire for SMSFs has stated it will accept non-lapsing nominations. To be on the safe side trustees should check with the fund’s accountant or auditor to confirm what will work for their fund.
Taking out insurance for members is another job that trustees of an SMSF must now be involved in. Prior to new legislation in August 2012 there was no legal requirement for insurance to be considered for members of an SMSF.
The new regulation however only requires SMSF trustees to consider whether the fund should take out insurance for its members, rather than forcing them to take it out. This new requirement will add to the paper work required to be prepared by, or on behalf of, trustees of an SMSF.
Trustees will need to document that they have considered what level of insurance cover is required for each member and, if required, whether the insurance is taken out inside or outside of the SMSF.
This could be either done as a trustee’s resolution specifically relating to insurance or it could form part of the fund’s investment strategy. This will mean the resolution or paragraph will need to detail why insurance is either required or not required for members and, if needed, how much and where the cover will be taken out.
The amount of insurance a person needs is based on two main components. The first amount should pay off any loans of the family of the deceased. The second is the lump sum required to increase the amount in superannuation so that an income can be paid to the dependents of the deceased.
As a general rule the greater the value of loans that a person has, the higher the income they are earning, and the younger they are, the greater the amount of life insurance they need. As a person gets older, and their investments including super increase in value, the less they need. In the forms section of the survival centre is a worksheet that can be used to calculate how much insurance a member needs.
Even if as a result of doing the calculations some insurance should be taken out there are often very good reasons why this is not done within an SMSF. One of the main reasons why people have an SMSF is to maximise the amount they have in superannuation. Because life insurance is an expense of a super fund the premium costs reduce the earnings of a fund.
Insurance is one area where an SMSF can be at a disadvantage when compared to large industry and commercial super funds. Because of their size these other funds have greater buying power that enables them to secure insurance cover for their members at very low rates.
Where the trustee/members of an SMSF want insurance they should obtain quotes from several sources. These costs for their SMSF should be compared with the cost of insurance through the large industry funds. If the quote is competitive then the cover can be arranged through the SMSF, with it being shown as being the owner of the policy.
In this case where insurance will be too costly the trustees, like industry and public offer funds, can have their members sign a form stating they will not take out insurance within the SMSF.
One option can be for members to join an industry fund that provides life insurance at a very reasonable cost and have some of their SGC super contributions directed to this fund.
Whatever decision is made the trustees of an SMSF will need to document the process and decision in some way. If trustees use a fund administrator for the SMSF the life insurance requirement could lead to a small increase in their administration costs.
This is because service providers will need to include life insurance calculations and the extra documentation as part of their work. If trustees however do the calculations themselves and document the findings there should be no increase in administration fees.
Where life insurance is to be taken out through an SMSF, and there is life insurance in an existing super fund a member belongs to, the benefits in the other fund should not be rolled over until the life insurance has been taken out in the SMSF. In the event of the member not being able to secure insurance cover, or the cost of the premiums will be too high, the insurance in the old fund should be left in place.
The Step By Step Administration Guide For SMSF Trustees
The greatest amount of administrative duties and regulatory compliance placed on trustees of an SMSF relates to making payments. The regulatory compliance comes from the restrictions placed on what trustees can invest in and when payments can be made to members.
The administration and documentation requirements mainly come from the regulations contained in the SIS legislation. It is these regulations that require trustees to communicate with themselves to prove that they have met all of their legislative and compliance duties.
This section will build over time depending on what members want. Currently this section deals with administration steps for the following:
- Investment strategy
- Transition to retirement pensions
- Lump sum Payments
- Account based pensions
- Changing Trustees of an SMSF
- When should an SMSF be wound up
- How to wind up an SMSF
In this section I will detail what the rules are and the administration process required. In the survival kit section there are examples of the documentation required to be completed that can be downloaded as a Word document. You will need to complete the relevant information such as the name of the SMSF and members details.
Rather than requiring a meeting to pass a resolution I prefer that a resolution in writing signed by all trustees or directors of the trustee company, called a circular resolution, is completed. One advantage of this is that there can be no dispute as to whether or not a meeting took place, and whether the decision made was agreed to by all trustees or directors of the trustee company.
Preparing an Investment Strategy and Purchasing Investments
It is important for trustees to be reminded of the rules that apply to the purchase of investments. The main requirement being that the investments must fit within the investment strategy for the super fund.
As long as an investment being purchased is allowed by the investment strategy, and the payments comply with the other investing rules such as,
- the investments must be purchased and maintained at arms length,
- the investments cannot be purchased from related parties except in limited cases, and
- In-house assets cannot exceed 5% of market value of the fund,
no resolutions need to be passed or correspondence prepared.
All of the normal documentation when purchasing investments will however need to be completed. Trustees when completing this documentation should make sure that the investment is being purchased in their capacity as a trustee for the super fund. Where this is not done, and the trustees are individuals, there can be confusion as to whether it is a super fund investment or a personal investment. It is also a requirement that the super fund is always shown as being the owner.
There are some assets that can only be registered in the name of the trustees without the super fund’s name being mentioned, such as property. In this situation back up documentation should show the investment is being purchased by the super fund. In addition it would be good practice for the trustees to pass a resolution that states this.
Starting a Transition To Retirement Pension
With the large number of baby boomers having SMSFs one of the first chances of accessing their superannuation is as a transition to retirement pension when they turn 55. Although there is a lot of documentation required when one of these pensions is started, the benefits for the super fund and the member outweigh this extra work.
When transition to retirement pension is paid by a super fund it pays no tax on the income earned to fund the pension. In addition if the member is 60 or over they pay no tax on the pension, if they are under 60 the member gets a 15% tax reduction in the form of a tax offset on the taxable portion of the pension received. Where the member’s super balance included tax free non-concessional benefits, that portion of the pension will be received tax free.
The documentation required for a transition to retirement pension to be commenced is as follows:
- a letter from the member to the trustees requesting that they commence a TTR pension,
- a letter from the trustees back to the member acknowledging receipt of the request, a statement that the TTR pension will commence, and that a TFN declaration form was enclosed for the member to complete,
- a resolution passed by the trustees detailing the member’s request and that the TTR pension will we paid,
- the member completes the TFN declaration, and
- in some cases the super fund sometimes needs to register for PAYG Withholding tax. This will involve the trustees in completing a BAS once a quarter and forwarding tax withheld from the TTR pension to the ATO.
Often when a TTR pension is commenced members will still also be in accumulation phase. As a result trustees must decide whether they will segregate the assets of the fund between the two member’s accounts, or request an actuarial report.
If the decision is made to segregate the assets trustees will a have to keep track of the income from each of the assets and allocate it to the correct member.
Trustees must make sure all of the income relating to the pension assets is deposited into the pension bank account, and all of the pension payments are paid out of this account. Income from the accumulation assets and super contributions must be deposited into the accumulation bank account.
In some cases the extra work required by trustees, and/or the extra work and cost required by their administrator or accountant, can outweigh any real benefit from segregating the assets. Segregation of the assets really only works when there are some investments that will produce large capital gains and a case be made for segregating those investments with them being allocated to the pension members.
Lump Sum Payments
Lump Sum Payments
There can be many reasons why an SMSF needs to make a lump sum payment. It could be as a part of a re-contribution strategy, or it could be that a member it requires one large amount for such things as a new car or an big overseas holiday.
When a lump sum payment is required by a member there needs to be correspondence and resolutions to support the payment. In addition a member must have met a condition of release so that they can have non-preserved benefits in their account paid as a lump sum payment .
Lump sum payments can be made from a member’s account that is in accumulation phase and also from a member’s account that is in pension phase. If a member is in pension phase, unless they are receiving a transition to retirement pension, they should have already met a condition of release and this would not need to be addressed when requesting a lump sum.
Care needs to be taken with lump sum payments from a superannuation fund to a member who is under 60. Payments up to the lump sum threshold, which is increased annually each year in line with increases in AWOTE in $5,000 increments, are tax-free and any excess is taxed at 16.5%.
The steps that need to be taken and documentation required for each of these lump sum payments are as follows:
Lump Sum Payment In Accumulation Phase
- A letter from the member stating that they have met a condition of release and they wish to withdraw or a lump sum payment.
- Resolution needs to be passed by the trustees acknowledging receipt of the lump sum request and authorising the payment.
- A letter from the trustees to the member acknowledging receipt of the request and confirming the payment will be made.
- Payment made to the member’s bank account.
Lump Sum Payment In Pension Phase
- A letter from the member stating that they require a lump sum payment as part of their pension.
- A letter from the trustees acknowledging receipt of the request and confirming the payment will be made.
- Payment made to the member’s bank account.
Starting an Account Based Pension
The documentation required for an Account Based Pension is very similar to that required for a TTR pension. The main differences being:
- there are no maximum limits on the amount of pension that can be taken,
- a condition of release must have been met for an ABP to be started.
Just as was the case with a TTR pension the documentation required is a series of letters and resolutions by the member and trustees as follows:
- A letter from the member to the trustees stating that they have met a condition of release and that they want to commence an ABP,
- A resolution passed by the trustees detailing the member’s request and that the ABP pension will we paid,
- A letter from the trustees back to the member acknowledging receipt of the request, a statement that the ABP will commence, and that a TFN declaration form was enclosed for the member to complete,
- The member completes the TFN declaration, and
- In some cases the super fund sometimes needs to register for PAYG Withholding tax. This will involve the trustees in completing a BAS once a quarter and forwarding tax withheld from the TTR pension to the ATO.
Just as was the case with a TTR pension when a member who is under 60 receives an ABP they will pay tax on the taxable portion of the pension received. This taxable portion is calculated at the start of the pension based on the percentage held in the member’s accumulation account of tax free super benefits. The tax payable on the assessable amount of the pension received will also receive a 15% tax reduction in the form of a tax offset.
The super fund will pay no tax on the income generated to fund the pension payable. If the value of the pension accounts is below the pension transfer limit the trustees of the fund will can choose to either segregate the assets of the fund between the member’s accounts in pension phase and those in accumulation phase, or use the proportional method and obtain an actuarial certificate.
Changing Trustees Of An SMSF
There are number of reasons why the trustees of an SMSF are changed.
One of these is forced upon an SMSF when the trustees are individuals and one of them dies. Another reason can be when individual trustees want to be proactive, and rather than being faced with a lot of paperwork at a time in their life when they have lost their partner, preferred to form a company to take over as trustee of the SMSF.
This section of the SMSF survival centre takes trustees through the process of changing a trustee and the other administration work required.
In the section of the survival centre I will detail the following:
- when a new trustee of an SMSF needs to be appointed,
- the reasons why it is best to have a company acting as trustee for an SMSF,
- the process of changing trustees of an SMSF,
- what the ATO regards as best practice after a new trustee has been appointed, and
- what legally trustees need to do after appointing a new trustee and how time and money can be saved by not following the ATO requirements blindly.
When Does An SMSF Need A New Trustee
There are several times during the life of an SMSF when a new trustee needs to be appointed.
When a new member joins an SMSF that currently has individuals acting as trustees. In this case because all members need to be trustees the new member must be appointed to act as a trustee.
When two individuals are acting as trustees for an SMSF and one of them dies one of the following must occur:
- another person is appointed to act as the second individual trustee,
- a company is formed to take over as trustee with the remaining member as a director,
- convert the SMSF’s investments to cash and roll the surviving member’s benefits into an industry or public offer fund, or
- wind up the SMSF and pay out the benefits to the surviving member.
Where the remaining member of an SMSF wants to continue with the fund options one and two are the only really viable choices.
After the death of a member/trustee the remaining trustee has six months to take action. A new individual trustee can be appointed, or a company take over trustee,at any time while both original indivdual trustees are still both living.
The problem is the administrative steps to be taken and documentation needed when appointing a new trustee, either by choice or as a result of death, will differ depending on who is providing the advice.
The Reasons Why It Is Best To Appoint A Company As Trustee
Choosing to have a company act as trustee adds another level of cost to the setup of the SMSF. As a result many people in the past chose to be individual trustees. Because of the problems that can occur when an individual trustee dies this can prove to be a false economy.
The extra cost of having a company act as trustee is initially about $800. There is also an annual lodgement fee of $42 a year as long as the company only acts as a trustee for the SMSF.
Having a company act as trustee can be an advantage for the following reasons:
- When there is only one member. If a company is not used another person must be found to be a trustee. This means whenever super fund documentation needs to be signed the other non-active member must be available.
- Having a company act as trustee makes it easier to differentiate between personally held investments and superannuation investments. In addition having a company with a short name makes it easier when filling out applications and other documentation when buying investments.
- For a husband and wife fund when one of them dies very little work is required.
This means when individual trustees a want to plan for the future when one of them dies it makes a lot more sense to appoint a company to take over as trustee rather than appointing one or two extra individuals as trustees.
When individuals act as trustees for an SMSF most of the documentation required to be signed, including the buying and selling of investments, requires all trustees to sign. Depending on where each of the individual trustees live this can prove to be a logistic an administrative nightmare.
The Process Of Changing The Trustee For An SMSF
When it comes to the documentation required for changing the trustees of an SMSF this is split into two categories:
- Documentation required to remove the existing trustees and appoint the new trustee or trustees.
- Documentation required to change the name that investments are held in. Some SMSF professionals and the ATO states that when there is a change of trustee all investments should be changed. In fact there is no legal requirement for all investments to be held in the currect trustees’ name.
In addition to extra administration work for the trustee/members, or extra costs because an administration service is changing the name of the trustee on all investments, there can also be stamp duty costs depending on where investment registers are held.
Changing the name of the trustee on all investments does not make sense when there is an alternative, and when the SMSF holds investments that are expected to mature or be sold within the next 5 to 6 years.
Documentation To Appoint A New Trustee
The documentation required to resign individual trustees, and the appoint an extra individual or company to take over as trustee, should be set out in the SMSF’s trust deed.
Some SMSF administration providers and lawyers state that when there is a change of trustee a deed must be drawn up to document the change. This can involve the members in a cost that in many cases is not warranted.
In many trust deeds I have seen there are clauses that state trustees of an SMSF can be removed and appointed when all or more than 75 per cent of the members agree to it in writing.
This means trustees in most cases, if the deed allows it, only need a resolution signed by all members to be drawn up. The resolution would detail the resignation of the individual trustees and the appointment of the company as trustee.
There may be documentation required such as the resignation of the original trustees and acceptance of the new trustee in writing. This can simply take the form of a letter written by the original trustees resigning and another by the directors of the company accepting the appointment of trustee.
Once a new trustee has been appointed, whether that is an additional individual or a company, there is extra administration work that can be required relating to the name that the SMSF’s investments are held in.
Check List For Changing The Trustee Of An SMSF
The process of changing the trustee of an SMSF can best be summarized as follows:
- Decide on whether an individual or a company will be appointed as a trustee.
- If a company is to be appointed one needs to be either formed, or if the members have a non-operating company this can be appointed to act as trustee. In this case an application can be made to ASIC so that the reduced annual fee will apply.
- Check the trust deed of the SMSF to work out what documentation must be drawn up.
- In most cases this should only require a letter from the individual trustees resigning, a letter from the directors of the company accepting the appointment as trustee, and a resolution signed by all members agreeing to the removal and appointment.
- Contact the financial institutions that the SMSF has its bank accounts with to work out what documentation they require.
- In most cases banks and other financial institutions will require anti-money laundering proof of identity forms to be completed plus providing copies of an ASIC search that shows the names of the directors of the company.
- Decide whether to change the name of the trustees on all investments or just those you want to. Check with the auditor of your SMSF to make sure they will be happy for not all of the investments being change the name of the new trustee. If the auditor says that you must change the name for all investments possibly look for a new auditor or accountant.
- If not changing the name of the trustee on all investments pass a resolution signed by all members that states that they will continue to hold the investments, with the list appearing below, in the capacity as custodians for the members and the trustee.