The flexibility to decide on your risk profile and invest in assets of your choice is among several attractive benefits of an SMSF. But with this flexibility comes significant responsibility.
For starters, the Australian Taxation Office (ATO) imposes several legal restrictions and compliance rules around property you can invest in via a limited recourse borrowing arrangement (LRBA). If the SMSF trustees fail to abide by the sole purpose test or their proper administration and audit obligations, the ATO can impose penalties.
This is one reason many people consider outsourcing the compliance aspects of their SMSF to a professional SMSF administration firm. You can continue utilising the flexibility of investing as you see fit, but the administration firm can help you ensure that you stay on top of all the SMSF compliance rules.
Here’s an overview of how SMSF administration firms work, and how they can potentially help you and your SMSF.
What is an SMSF administration firm?
SMSF administration firms are companies that specialise in establishing and managing self-managed super funds so that they are compliant. SMSF administration firms generally offer various services, including establishment, management, accounting, tax compliance and auditing services.
While self-managed super funds are often dubbed as DIY super funds, they come with a number of administrative and compliance regulations that require careful navigation. Because of the risks and penalties associated with non-compliance, it’s important to understand the requirements when setting up and managing an SMSF.
So, that’s where SMSF administration firms can come in. They can offer assistance with:
- Setting up an SMSF
- Ensuring the SMSF is compliant
- Administering the SMSF
Setting up an SMSF
SMSFs that aren’t set up properly are likely to be significantly more difficult to administer down the line, and they may not have access to the ATO’s tax concessions. So, this means setting up an SMSF is the first, arguably most important step of managing it correctly. Regardless of how much you know about SMSF regulations, it can be useful to speak with a professional to help you establish the SMSF.
Some factors to consider when establishing an SMSF include:
- appointing SMSF members and trustees correctly
- implementing a compliant trust deed (a legal document that covers how to establish and operate your SMSF)
- signing the trustee declaration (a statement that trustees understand their duties and responsibilities)
- lodging an election with the ATO
- registering the SMSF with the Australian Business Register
- establishing an investment strategy
- taking out appropriate insurance cover for each SMSF member to protect them against investment risk.
SMSF administration firms will generally carry out all of the establishment tasks so that your fund is set up correctly and eligible for the ATO’s tax concessions, which include paying a maximum of 15% tax on most income.
There are many compliance issues relating to the investments that an SMSF can hold and the contributions and payments it can receive and make. For example, the most important compliance consideration is that all investments must satisfy the sole purpose test, which requires all investment decisions to be made solely for providing benefits to the SMSF’s members.
And when it comes to purchasing property, there are some strict guidelines too. For example, SMSF trustees generally can’t buy property from fund members or relatives, and members can’t live in or rent out the SMSF property.
If the SMSF trustees want to borrow money, they must do so through a limited recourse borrowing arrangement.
There are also several SMSF taxation compliance obligations to be aware of, including asset valuation requirements and strict lodgement due dates.
Employing the services of an SMSF administration firm will help ensure that the decisions SMSF trustees are making are above board and satisfy all the applicable compliance rules. The firm will also help ensure that all tax lodgement deadlines are met.
SMSF administration is often the most time-consuming and complex aspect of maintaining an SMSF. Some administrative duties include:
- maintaining investment registers
- recording every single transaction the SMSF makes
- preparing annual financial reports and member benefit statements
- appointing an independent auditor to undertake an annual audit
- preparing and lodging income tax returns
- pension calculations according to the pension standards (e.g. the SMSF must pay a minimum amount each year to a member from their pension account)
Most SMSF administration firms have sophisticated software that allows them to sync the SMSF bank account with the software so that the fund can be reconciled with transaction data (i.e. synchronising the bank account with the superannuation software), investments can be revalued (for example, property investments held by the SMSF must be revalued at least every three years), and member transactions can be processed.
And to ensure that the SMSF meets all its legal requirements, an annual audit with a specialist auditor or auditing firm is essential. SMSF administration firms can often assist by appointing an independent auditor (registered with the Australian Securities and Investments Commission) and liaising directly with that auditor to provide the relevant documentation.
Advantages and disadvantages of using SMSF administration firms
Based on what SMSF administrators do, the obvious benefit of engaging the services of an SMSF administration firm is that you can save time by having them manage all compliance-related administrative tasks. This could help you minimise the risk of failing to satisfy all the legislative requirements, and mean you’ll have more time to focus on your investment strategy to maximise returns.
However, these benefits come at a cost. If you were to hire an SMSF administration firm, the costs of doing so would be in addition to the existing costs of running an SMSF.
Many SMSF administration firms have flexible service packages that allow you to tailor their services to your needs, so it is worth getting quotes from a number of firms. Typically, simpler funds are less expensive to administer, while complex funds are charged at higher rates.
The main benefit for many Australians who choose to establish an SMSF is the flexibility to control and manage their super assets. But with that freedom comes a host of compliance responsibilities.
While SMSFs may be a form of DIY super fund, they involve a large amount of administrative duties and compliance regulations that need to be followed.
That’s why many people choose to hire the services of an SMSF administration firm. It comes at a cost, but you’ll have to consider whether the benefits of having full-service SMSF administration outweigh the administration cost.
Cover image source: Oriane Perrin/Shutterstock.com
About Brent Jones
Brent is one of the directors of SMSF Engine. He works with accountants and advisers to deliver services including management of superannuation, legal documents, and general insurance, and also financial planning. Brent is also a qualified systems analyst, graduate of the AICD Company Directors course and Member of the NTAA.