The tax and legal changes for investing in SMSFs

This is part four in SmartCompany’s five part Investing special report: The rules of investment. Written by SmartCompany and brought to you by Bendigo Bank.

The legal risks of investing in self-managed superannuation funds cannot be understated.

With SMSFs making up a third now of all superannuation investments, the country’s watchdogs are on guard. Recently, the Australian Securities and Investments Commission said it would be keeping a close eye on practitioners who give false or misleading advice.

This makes it all the more important SMSF trustees know how they can invest safely.

With so many people flocking to SMSFs, legislation has to change quickly. There have been several changes in the past few years which make investing trickier than it used to be.

As DBA Lawyers partner Dan Butler says, monitoring legal changes affecting SMSFs is critical.

“There’s a lot happening as it continues to grow.”

There are plenty of legal and tax-related changes set to occur in the next year in the SMSF space. It’s time to get up to speed.

Related-party transactions

One of the biggest changes is the tinkering with related-party transactions. As a response to the Cooper Review, the federal government has proposed new rules for transactions between SMSFs and related parties.

The new regulations mean that acquisitions – and disposals – of assets between related parties and SMSFs will generally be barred, although there are some exceptions.

Businesses can still acquire property and some in-house assets from a related party, as long as those assets don’t exceed 5%. The asset also has to be acquired at market value, and by a qualified, independent valuer, which is a new change many trustees aren’t even aware of yet.

However, Stuart Jones, from Thomson Reuters, says there are some exceptions to this.

Funds can acquire a “listed security”, such as a share, or unit, in a trust listed on an approved stock exchange. The regulations surrounding this are still yet to be released. As Jones points out, it remains unclear whether there’ll be a specific method for off-market share transfers.

“Related parties conducting such transactions on-market will also need to be mindful not to infringe the false trading and market rigging provisions.”

These changes were set to occur on July 1, 2012, but were pushed back until July 2013.

Registration process

The registration and rollover processes will be changed, in a move the government claims will help reduce the amounts of funds being released from SMSFs.

From July 2013, proof of identity checks will be required for joining an SMSF, either for a new fund or an existing fund and identification measures won’t apply retrospectively.

SMSF trustee duties

Since August of 2012, there are new standards in place which require trustees to review the fund’s investment strategy on a regular basis.

These reviews also require the trustee to consider whether they should provide insurance for new members, and keep the money and assets in a separate account.

Stuart Jones says by making these requirements operating standards, the Australian Tax Office has the power to enforce compliance, rather than just rely on voluntary compliance.

“A person who intentionally or recklessly contravenes an operating standard is guilty of an offence punishable on conviction by a fine up to $17,000.”

Changes to insurance

There are new regulations – set to come into effect next year – which limit the types of insurance you can have in your SMSF.

Right now, SMSFs can have insurance in your fund that isn’t released in the event of a claim. But after the changes start from July 2014, new members will only be allowed conditions of release consistent with superannuation conditions of release – such as death.

The changes also mean SMF trustees cannot insure themselves. They’ll only be able to insure themselves and members by using an insurance policy.

Dan Butler says you’ll also need to regularly review your insurance policy.

“By law, your insurance strategy will have to be regularly reviewed,” he says. “There have been quite a few changes in this area.”

Trustee penalties

From July 1 of 2013, the Tax Commission will have the power to issue administrative penalties to trustees for contraventions. The idea is that giving the commissioner more power will force SMSF trustees to quickly change faults rather than just wait until a court forces them to do so.

But the penalties are large and on a sliding scale. They range from $850 to $10,200 for specific contraventions of the law, and any penalty is payable personally by the person who committed the breach. This cannot be paid by the assets of the SMSF.

Tax in breach of law

Any benefits received in a superannuation fund in breach of law will be taxed at the rate of 45%, rather than the marginal rate of the individual involved.

There is also proposed legislation which states a person cannot promote a scheme that has resulted, or “is likely to result” in payments from a super fund acting outside the law.

As Jones points out, any person who promotes any type of scheme or similar scheme will be open to fines worth as much as $340,000.

“Contravention of a civil penalty provision may also be punishable on conviction by imprisonment up to five years.”


Any auditors who currently conduct SMSF audits need to apply for registration with ASIC, so they’ll be registered by July 1.

Registration is now mandatory for anyone conducting an SMSF audit from July, and as the watchdog points out, sanctions will apply if any auditors act without approval after that date. Auditors will also need to meet independence standards.

Any SMSF trustees need to keep in mind any auditor must be registered after July.

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