A self-managed super fund (SMSF) can be a great way to manage your superannuation money. We’ve outlined some of the most common mistakes SMSF trustees make and the things you can do to avoid them.
- An SMSF trustee purchases an investment that is not accommodated within their investment strategy All SMSFs must have an investment strategy that outlines how they intend to invest their superannuation money.
Trustees are required to ensure that at all times during the year the investments of the SMSF are made in accordance with that strategy.
If this doesn’t happen, the trustee can be fined by the Regulator. If you’d like to add a new investment, to avoid any penalties you’ll first need to amend your existing strategy to accommodate the new investment.
If this isn’t done the asset cannot be purchased. You can change your investment strategy as often as is necessary.
- The rules of the SMSF must allow borrowing If an SMSF trustee wants to borrow money to invest, they must first confirm that the trust deed of the SMSF allows them to borrow.
Gearing has only been permitted in SMSFs since late 2007. Prior to that, it was not allowed and it was common for trust deeds to have clauses which prohibited borrowing.
Trustees need to update their trust deeds to allow borrowing before entering into the arrangement.
- A borrowing structure must be in place before an asset is purchased Another aspect of borrowing through SMSFs is that trustees find assets that they want to purchase, and enter into formal arrangements, and do so personally.
They then decide they want their SMSF to purchase the asset using borrowed money instead. If this asset is later transferred to the SMSF, this will have a detrimental tax and stamp duty implication for the member personally and the SMSF.
Always ensure that the limited recourse borrowing arrangement has been established before purchasing the investment.
- Residential property cannot be acquired from related parties SMSF trustees often want to transfer personally owned residential investment property (either by sale or as a contribution) to their SMSF.
SMSFs are not permitted to acquire residential property from a member, their relatives or related businesses.
Listed shares and managed funds are an exception to this rule and can be acquired from these related parties.
- SMSF investments must be in the right names The investments held by SMSF trustees must be in the names of all the current individual trustees or the corporate trustee.
All asset registers, investment accounts, managed funds, broking accounts etc. must be amended for any change to individual trustees or the corporate trustee.
However, where there is a change in the Directors of a corporate trustee there is no need to change anything as the company is still the correct owner.