With the self managed superannuation fund (SMSF) annual return lodgment deadline upon us, minds should have already turned to meeting compliance requirements. The 2016–2017 financial year includes a few twists and turns which trustees should factor in to avoid late lodgment. 

The super changes from 1 July 2017 mean that SMSFs members with a pension balance of more than $1.6 million may need to consider reducing any excess, resetting CGT cost bases and getting actuarial certificates. This is in addition to the usual issues such as calculating taxable income and what expenses are deductible for the SMSF.

With all these changes, the ATO allowed an extension to lodge returns by 2 July.

Beware the transfer balance cap

If people have a total balance of more than $1.6 million in pension phase as at 30 June 2017 in all of their super funds, they should have already reduced it to no more than $1.6 million by 1 July 2017, otherwise a penalty will apply. The excess can be either transferred to accumulation phase or withdrawn as a lump sum. For anyone in receipt of a defined benefit pension with a value of more than $1.6 million, or a combination of defined benefit and account based pension over that amount, an adjustment of all account-based pensions will be required. Any adjustment for these purposes can allow access to CGT relief, but there are exceptions.

Eligible for CGT relief?

Where a pensioner has reduced the balance of their account-based pension to meet the $1.6 million cap, or they are in receipt of a transition to retirement pension (TRIS), they may have access to the transitional CGT cost base reset. The reset allows a fund to notionally sell the CGT asset at its market price and immediately notionally acquire it to reset the cost base for CGT purposes. The operation of the reset depends on whether the fund calculates its exempt and taxable income on a segregated or proportional basis. If the segregated basis is used, it is possible for the CGT asset to reset its cost base between 9 November 2016 and 30 June 2017, but if the proportional basis is used the market value on 30 June 2017 applies to reset the cost base.

Why would you reset the CGT cost base of the fund? The answer lies in the potential tax benefits. It's not compulsory to reset if you qualify and sometimes, it may be better not to. Don't forget the reset is available only if the amount you have in pension phase on 30 June 2017 is more than $1.6 million or you were receiving a TRIS at that time.

If you decide to reset the CGT cost base of an asset, an election must be made and information is required about the amount of the reset that is deferred at ss 8F and 8G of the fund's Capital Gains Tax Schedule. Once the election is made, it's irrevocable.

Is an actuarial certificate needed?

In some circumstances, an SMSF will be required to obtain an actuarial certificate. The certificate is required if, at sometime during the 2016–2017 financial year, the fund calculated its exempt pension income on a proportional basis. An actuarial certificate is not required if the fund used the segregated basis or the fund was wholly in pension phase throughout the financial year. For the 2017–2018 financial year, an actuarial certificate will also be required for all SMSFs where at least one fund member has a total superannuation balance of at least $1.6 million as at 30 June in the previous financial year.

Keep track of contributions

Keeping track of contributions is something trustees need to do. All contributions should be classified on the basis of their taxation and preservation status. If a fund member decides to claim a tax deduction for personal contributions, they will need to complete an election. It needs to be given to the fund when their tax return is lodged with the ATO, or by the end of the financial year after the contribution has been made, whenever is the latter. Trustees will be required to acknowledge receipt of the election.

Tax deductions for expenses

Deductions for expenses paid by SMSFs depend on a number of situations depending on whether the expense has been incurred in gaining the fund's assessable income. This means that any expenses that relate to exempt current pension income (ECPI) are not deductible, as they are incurred in gaining the exempt income of the fund. A fund that has accumulation and pension members will apportion expenses between those that are deductible and those that are not. There are some expenses which can be claimed in full, whether they are linked to exempt or assessable income of the fund. These expenses include the ATO's supervisory levy and premiums for death and disability cover.


Good SMSF compliance hinges substantially on good recordkeeping. But not every fund is necessarily good at it.

What records should be kept, when and for how long? Some SMSFs have resolutions and minutes for every investment transaction while others don't go into much detail at all. But what level of detail is really necessary? The answer lies in the fund's trust deed, investment strategy and what is required by the tax and superannuation legislation.

Every time an SMSF makes or disposes of an investment, the transaction needs to be seen in the context of the fund's investment strategy and the degree to which allowable asset classes, ranges and allocations are specified in that strategy. This will have a bearing on the amount of documentation required.

The legislation does not include specific provisions for recording SMSF investments. This means that investment reporting requirements for all superannuation funds apply to SMSFs as well. In this context, it seems reasonable the more detailed the fund's investment strategy the less likely it is to record investment decisions. However, in contrast, an investment strategy written in very general terms may mean recording of investment transactions more frequently and in greater detail.

For example, a fund with a single balanced option is unlikely to have to meet each time a contribution is made to decide where the money should go. In contrast, if the fund's investment strategy is couched in broad terms and a member wishes to select specific investments as permitted by the fund's trust deed, then documents indicating whether the selection is consistent with the overall investment strategy of the fund are likely to be worthwhile.

There are some areas where best practice seems to dictate that detailed documentation and/or minutes should be prepared, especially where the transaction is linked to specific provisions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (SIS Regs). Examples include:

  • acquisition of direct property, which can be owned wholly by the fund or owned jointly with other parties – documents would include those relating to the purchase of the property, rental agreements, agent appointments, plus those relating to service providers to handle repairs and maintenance;
  • any collectible or artwork which requires documentation relating to insurance, storage and possible leasing, which may be required due to the legislation;
  • loans by the SMSF to related and non-related parties which require a written loan agreement specifying the terms and conditions of the loan;
  • any "in specie" contribution or acquisition of an investment, which needs to be tested against the acquisition of assets from related parties and accompanied by a minute stating the transaction is permitted;
  • any in-house asset acquisition should be documented, as the 5% testing of the amount needs to be verified at time of acquisition, as well as outlining how the ongoing monitoring of the limit will be conducted; and
  • finally, any investment where the trustees act more in the capacity of investment manager, rather than trustee should be documented as the terms and conditions of the investment should be documented.

So it's important you document all significant meetings and decisions of your SMSF. It's a legislative requirement and keeping your reporting obligations up-to-date will help see that your fund remains compliant.

Even where an SMSF is involved, minutes and resolutions need to be taken seriously and read carefully before signing. They provide an official and legal record, or evidence of actions and decisions made by the trustees. If the minutes and resolutions are ambiguous and unclear they can lead to possible legal ramifications. Just because an SMSF is small doesn't change things; minutes and resolutions are just as important as they are for larger funds.

Trustees should affirm the investment strategy at least annually noting whether all current investments are consistent with that strategy. This will then cover any other investment related transactions that do not require specific documentation.

Make sure the investment strategy is reviewed or varied when certain member-related events occur. This would include admission, resignation or death of a new member, or the commencement of a pension benefit or lump sum.

Other good reasons for recording information about the fund's investments relate to the trustees being challenged. Documenting an investment decision can be used as a legal defence to justify why it was made. Documentation assists auditors in carrying out their responsibilities under the SIS legislation and for reporting to the ATO as regulator of SMSFs.

The superannuation law requires that some records must be retained for various periods. For example, the fund's accounting records, annual returns and other statements are required to be kept for at least five years. However, minutes of meetings such as reviewing the fund's investment strategy, changes of trustees, member reports and storage of collectables and personal use assets need to be kept for at least 10 years. Documents like the fund's trust deed and other essential documents should be retained if the trustees consider the fund may be subject to challenge.

Keeping records for an SMSF serves many purposes to provide a "corporate memory" for the fund which may be required for compliance purposes as well as to protect trustees from any unfounded challenges.

Time to start on SMSF returns

So, if you haven't got to work on this year's SMSF return, it's certainly time to start now in view of the changes to super that have taken place. Don't forget to make an adjustment if the total of your pension balances are impacted by the transfer balance cap, reset the CGT cost base if appropriate and arrange for an actuarial certificate if required. Then there's making sure contributions are correctly classified, income is properly accounted for and deductions are correctly classified.New Post