When you set up a Self-Managed Superannuation Fund (SMSF), it may be established with a corporate trustee.
In those circumstances, ordinarily, every member of the relevant SMSF must also be appointed as a director of the corporate trustee.
Importantly, within 21 days of appointment as a director, the relevant individual must sign a Trustee Declaration confirming they understand and will follow the obligations set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act) regarding governance, investments, borrowings, benefit payments and recordkeeping.
It is crucial that directors both understand and comply with their duties as a director of the trustee of their SMSF.
1. Key Duties and Obligations of SMSF Trustee Directors
Acting Honestly, Carefully and in Members’ Best Interests
- A trustee director has the duty to act honestly, carefully and competently, prioritise the best financial interests of all members, and ensure the fund operates in accordance with the trust deed and the SIS Act. A director must collaborate with co-trustees and retain effective control over core decision making.
Meeting the Sole Purpose Test
- Directors have the duty to run the SMSF solely to provide retirement benefits to members (or death benefits to dependants if a member dies). The sole purpose test means that a director cannot allow personal use of fund assets, unlawful early access to superannuation, or any present-day advantage to be provided to members or related parties out of the SMSF.
Accepting Contributions and Rollovers Correctly
- Trustee directors must ensure contributions and rollovers are only accepted in line with the trust deed and superannuation law. To that end, every receipt should be documented and allocated to the correct member to create a clean audit trail.
Developing and Reviewing the Investment Strategy
- Every SMSF must have an investment strategy tailored to the needs and circumstances of its members.
- By law, trustee directors must prepare, implement and regularly review an investment strategy having regard to all the circumstances of the fund, which include, but are not limited to:
- the risks associated with the fund’s investments;
- the likely return from investments, taking into account the fund’s objectives and expected cash flow requirements;
- investment diversity and the fund’s exposure to risk due to inadequate diversification;
- the liquidity of the fund’s investments having regard to the fund’s expected cash flow requirements in discharging its existing and prospective liabilities (including benefit payments); and
- whether the trustees of the fund should hold insurance cover for one or more members of the fund.
Following Investment Restrictions
- Trustee directors are prohibited from:
- giving financial assistance using the resources of the fund to a member of the fund or a member’s relative;
- borrowing money on behalf of the fund except in certain limited circumstances (e.g. a limited recourse borrowing arrangement);
- acquiring an in-house asset if the fund’s in-house assets exceed or will exceed 5% of the market value of the fund’s total assets (in-house assets are loans to, or investments in, related parties of the fund or assets subject to a lease or lease arrangement between the trustee and a member or related party)
- entering into investments that are not made or maintained on an arm’s length (commercial) basis.
Valuing Fund Assets Correctly
- Each year the SMSF’s assets must be valued at market value for reporting and financial statement purposes. Trustee directors must ensure these market valuation reports are provided to the SMSF auditor.
Preparing Annual Financial Statements
- Trustee directors must ensure that yearly financial statements for the SMSF, including a statement of financial position and an operating statement, are prepared and provided to the relevant persons.
Arranging the Annual Audit
- Trustee directors must arrange the annual audit of the SMSF by an approved SMSF auditor registered with ASIC. The auditor reviews the fund’s financial statements and assesses whether the fund has complied with superannuation laws, reporting any breaches where required.
Lodging the Annual Return and Paying Fees
- Trustee directors must also prepare and lodge the SMSFs annual return by its due date and pay any tax liability as well as the annual supervisory levy. They may also need to lodge transfer balance account reports or activity statements, depending on your fund’s circumstances. A trustee director must also ensure ASIC fees are kept up to date.
Notifying the ATO and ASIC of Changes
- When certain changes are made to the SMSF, such as updates to trustee details, member changes, or structural changes, a trustee director must report these changes to the ATO and ASIC within 28 days.
Keeping Proper Records
- Directors must maintain accurate and complete records of all decisions, transactions and fund activities. These records support compliance and are essential for audit purposes.
2. Risks and Penalties for Non-Compliance
- The ATO has broad powers in terms of punitive and compliance action that may be taken in the event of a breach by a director of a corporate trustee of an SMSF. Even unintentional breaches can have serious consequences.
- Depending on the nature and seriousness of the breach, the ATO may issue a rectification direction, an education direction, or administrative penalties that must be paid personally by you and cannot be reimbursed from SMSF assets.
- For serious or repeated issues, ATO action can escalate beyond education or rectification and raise assessments and liabilities at the fund or member level.
- The ATO also has the power to disqualify persons from acting as the director of a trustee company for a SMSF. When disqualification occurs, those persons are publicly listed as a banned or disqualified person and must immediately cease acting as a trustee director.
- To protect member benefits, the ATO can also seek to freeze SMSF assets, preventing transactions while compliance issues are addressesed.
- In the most severe cases, the ATO may issue a notice of non-compliance to the fund. A non-complying SMSF loses access to concessional tax treatment which can restrict the fund from receiving employer contributions or rollovers. Any income a non-complying SMSF makes is taxed at 45% rather than 15% for each year it remains a non-complying fund. In addition, in the first year the fund becomes non-complying, an amount broadly equal to the market value of the fund’s assets is included in assessable income, which means a fund may lose almost half of the value of the SMSF assets in tax.
- Serious breaches of the SIS Act can also result in the ATO applying for civil or criminal penalties to be imposed on individual directors.
3. Best Practices as an SMSF Trustee Director
- Staying on top of a director's duties and obligations protects a SMSF's compliance and its tax concessions. Effective governance and proactive oversight reduces the risk of breaches, penalties and administrative action by the ATO.
- A key element of best practice is clearly defining the purpose and objectives of the fund through a written investment strategy tailored to each member’s age, risk tolerance, contribution intentions, liquidity needs and desired asset mix, keeping the fund aligned with the sole purpose test.
- We strongly recommend that SMSF trustee directors engage professional support early. Legal advice, SMSF specialists, and accountants can assist with drafting fund deeds, registering the fund, establishing bank accounts, and ongoing reporting obligations.
- Once established, directors should stay informed about regulatory updates, monitor changes in member circumstances, and ensure investment decisions remain consistent with the fund's investment strategy.
4. When should a Trustee Director Seek Professional Advice?
- If anything feels unclear, whether it is a complex transaction, a benefit payment, a red flag from your auditor, a change in member circumstances, or you have been directly contacted by the ATO in regards to an investigation, you should seek our advice.
