That’s a question all firms should be asking themselves if specialised SMSF administration services is not their core business.

Recent Government reviews have recognised the importance of SMSFs as a core pillar of the Australian retirement savings system and support the ongoing function of these specialised products, enabling Australians to have the maximum flexibility and control in self-funding their retirement.

Because of the increasing significance of SMSFs, the Government also has an obligation to ensure the security and professionalism of this industry.  The success and growing maturity of SMSFs has brought with it increased responsibility and obligations on service providers along with intense scrutiny from the regulators:

• Proposed regulatory changes will require SMSF systems to comply with mainstream standards for processes in the operation and interaction of superannuation funds.
• Professional associations supported by changing regulations require the separation of duties from parties involved in the operation of SMSFs, particularly the separation of the audit function from other aspects of managing SMSF records.
• These continued regulatory changes along with the evolution of services enhancing access and transparency require a deep base of specialised knowledge and systems that only comes from continued investment in systems and specialists.

And this is just the start, we can expect continual regulatory changes to increase the security and transparency of this industry as part of the Governments continued emphasis on increased prudential  obligations on all involved in the superannuation industry.  Running SMSFs is no longer a cottage industry that can be performed “on the side” of your mainstream practice.

If running SMSFs is not your core business, how can you keep up with the continued investment necessary to stay on top of this specialised industry?  How can you maximise the opportunities that SMSFs provide without placing undue risk on your business or risk the loss of clients to other firms?

Simple Super Solutions can take the complexity, risk and cost out of providing SMSFs to your clients.  Our tailored services enable you to realise the benefits of this growth market while outsourcing the risk of specialised operations to us.

No – not without introducing self-review threats risking the impairment of independence of the audit.  The Joint Accounting Bodies have long published standards within their Independence Guide that highlights the risks of the same firm performing the audit and preparing the books for a client’s SMSF.

Furthermore, under the Government’s proposed “Stronger Super” initiatives currently being finalised, it is proposed to enforce this segregation of the audit function through legislation specifically banning the SMSF auditor from providing non-audit services to the client.  The segregation of functions is a key component of the Government’s regulatory framework for the operation of SMSFs with the audit function being undertaken by approved and truly independent auditors seen as a key safeguard to ensure the integrity and ongoing compliance of this growth industry.

Simple Super Solutions helps firms overcome this issue by undertaking all aspects of the management of records for your clients’ SMSFs, preparing and providing detailed working papers enabling you to continue to provide independent audit services for your clients. We also have a panel of independent auditors for your selection should you choose not to perform the audits yourself.

SMSFs that pay a pension are often required to obtain an actuarial certificate as part of the end-of year process.  Actuarial certificates are required in the following circumstances:

• Claiming tax exemption from pension related assets. An annual 295.390 actuarial certificate is required to claim exempt current pension income from income tax, if:
  • The SMSF has both pension and non-pension accounts and the assets backing these accounts are not segregated; or
  • The market value of assets supporting the income stream benefit exceeds the account balance supporting the benefit (where the excess will not be considered to be part of the segregated current pension assets).

• Adequacy (defined benefit pensions). All SMSFs paying defined benefit pensions (lifetime, life expectancy, term certain) require an annual actuarial valuation of the net assets to certify that there is a high degree of probability that the funds will be able to pay the pension as required under the fund’s governing rules.

Simple Super Solutions understand in-depth the requirements relating to pension accounts within SMSFs and the circumstances surrounding actuarial certificates.  We continually work with the appointed actuaries for our clients to ensure they receive the SMSF records they need to provide the required certification on time and with minimal fuss.

The following are some common mistakes we have come across in the administration of pension accounts within a SMSF:

• Market valuation of assets.  Care must be taken to ensure the SMSF end of year assets are valued at market rates. This is important in determining the minimum level of pension payable over the coming year.
• Payment of pensions. During the financial year all pensions paid must be paid to the member in "cash".  If a member receives a cheque for a pension payment that was dated and drawn pre 1 July but doesn’t bank it until after 30 June, the payment cannot be classed as "cash" for the year in which the cheque was drawn unless it meets strict guidelines provided by the Tax Office.

Also a member cannot receive a pension via an in-species transfer from the SMSF.

• Contributions and pension accounts. A member's pension account cannot receive contributions during the year, any contributions must be credited to a separate accumulation account for the member.  In a SMSF a member may have more than one pension account but cannot have more than one accumulation account.
• Contributions from reserve accounts. Some SMSFs have investment reserve accounts.  Amounts paid from these accounts are identified as concessional contributions and any amounts paid over 5% of the member’s balance are subject to the contribution limits (currently $25,000 if under age 55 or $50,000 if aged 55 and over).  Any the payments from reserve accounts that are subject to the contribution limits must be grossed up by 1/0.85 to allow for tax applicable to concessional contributions.  Members do not need to meet the work test to receive amounts from investment reserves.
• Investment strategies. SMSFs are required to have an investment strategy which should be reviewed regularly. Where pensions are being paid from and SMSF, it is important to be mindful that the investments must provide the income or capital to allow them to pay the minimum pensions required.  The following are some common problems that can occur:
  • In economically turbulent times some investments e.g. unlisted managed funds, may not be able to be cashed.
  • If a SMSF is invested heavily in property and is relying on capital gain and not rental returns, the assets may have to be sold to meet the minimum pension payments.
• Work test. A SMSF cannot receive contributions on behalf of a member aged of 65-74 unless the member has met the work test.  That is gainfully employed for at least 40 hours in 30 consecutive days during the financial year.
• Pensions which do not start on 1^st of July. A pensioner may start a pension part way through the financial year.  When a member's accumulation account is to be transferred to a pension account part way through the financial year, the accumulation account should be valued at the day before transfer.  This value reflects the maximum amount that may be used to back the pension and is especially important if the value of the assets have dramatically changed since the beginning of the financial year.  A member can determine how much they wish to transfer to a pension account, they do not need to transfer their whole accumulation account balance.

Regulations impose limits on the maximum superannuation contributions that can be made on behalf on an individual during a financial year.  There are also strict rules in place in respect of when and what types of contributions can be made in respect of an individual.  The following provides a brief summary of the rules and the thresholds that apply for the 2011-12 financial year.

Concessional contribution caps.

Concessional contributions are before-tax contributions that are assessable income for the fund.  These contributions are generally from the following sources:

• Employer contributions (including salary sacrifice contributions).
• Deductible personal contributions (self-employed).
• Superannuation Guarantee shortfall payments received from the ATO.

The current (and recent) limits that apply to the maximum amount of concessional contributions that can be made for an individual in a financial year are below:

* The higher transitional cap will expire on 30 June 2012. The Government has proposed that the cap could continue but only where the member’s total superannuation balance is under $500,000, though this change is yet to be legislated.

Non-Concessional contribution caps.

Non-Concessional contributions are after-tax contributions that are not counted as assessable income for the fund.  These contributions are generally from the following sources:

• Member contributions (for which no tax deduction has been claimed).
• Excess concessional contributions (over the caps above).
• Spouse contributions.

The current (and recent) limits that apply to the maximum amount of non-concessional contributions that can be made for an individual in a financial year are below:

* Under the “Bring Forward Rule” a member under the age of 65 in a financial year can “bring forward” an additional two years of contributions allowing up to $450,000 in non-concessional contributions to be made during a financial year. Making non-concessional contributions in excess of the cap during a financial year automatically triggers the bring forward rule, reducing the amount of non-concessional contributions that can be made in the following two years.

Acceptance of superannuation contributions.

Depending on the age of a member, there are rules that need to be met before a fund can accept concessional and non-concessional contributions as summarised in the table below:.

Regulations require that a total minimum annual of pension payments must be made from an account based income stream that depends on the age of the member and their account balance at 1 July or the pension start-up.  In recent years, temporary relief has been applied because of the Global Financial Crisis reducing this minimum amount.  The current temporary relief will expire at the end of the 2011-12 financial year.  The table below provides the minimum Percentage Factor of the member’s 1 July account balance that must be paid during the year:

Legislative changes introduced in 2007 along with clarifications provided in 2010, established the right of superannuation funds to borrow to invest in a “single acquirable asset”.  With these changes the desire for many SMSF trustees to borrow and gear their investments has increased, though the path to implementing a successful arrangement is complex with many technical requirements that need to be met.  Failure to meet the specific borrowing rules that are in place could have dire consequences for a fund.

The following provides a brief overview of the rules that apply and some of the issues that need to be considered:

• The fund’s trust deed must allow for the fund to borrow in accordance with the specific lending rules that need to be followed.
• The borrowing must be by the trustee of the SMSF and the asset must be held by another entity on trust (by a nominee trustee) until the loan is repaid with the beneficial owner being the trustee of the SMSF.  The loan needs to be recorded in the SMSF’s accounts and the fund will make repayments to the lender (not via the nomine trustee).
• The loan must be applied to the acquisition of an asset that the fund could invest in directly, and the asset must not be already owned by the fund.
• The loan must be a limited recourse loan with the lender’s rights against the trustee of the SMSF on default must be limited to the underlying asset itself.
• Consideration needs to be given to the impact on the fund’s investment strategy.  Borrowing can dramatically change the overall asset mix of the fund which needs to be considered along with any cash flow requirements that may be required of the fund.  Careful consideration also needs to be taken into what will happen in the event of the death of a member of the fund and appropriate insurance arrangements should be considered.
• Whilst it is not a legislative requirement, practically lenders will not lend to funds with individual trustees so a corporate trustee structure will need to be in place for the SMSF.
• It is important that the nominee trustee must exist solely to hold the asset in trust for the SMSF trustee until the loan has been repaid in full and not fulfil any other purpose.
• The loan can only be used to acquire an existing asset – it cannot be used to finance a development or renovation to a property for example as these would be deemed to be additional or replacement assets.

Whilst the legislation now allows for SMSFs to borrow to acquire an asset for the fund, the implementation of these arrangements needs to be handled with the upmost care with particular attention paid to the documentation supporting the arrangements.  Simple Super Solutions keeps up to date with the latest developments in this area and has assisted many of our accountant and adviser clients implement successful, complying limited recourse borrowing arrangements for their clients’ funds .