Self Managed Superannuation Funds (SMSFs)

have become a popular option for those wanting more control and flexibility over their retirement funds. But running an SMSF requires responsibility and attention to detail. Trustees must guarantee strict adherence to rules, manage investments wisely, and make sound, Long-term decisions to ensure members’ retirement benefits.

While the advantages exist, there are common challenges that range from simple administrative errors to major violations of statutory requirements, possibly leading to huge penalties, forfeiture of tax advantages, or even disqualification of trustees.

This blog intents in bringing some light to the 15 most common mistakes trustees commit and provides actionable advice on how to reduce risks and run an SMSF smoothly with confidence.

1. Neglecting the Sole Purpose Test

Mistake – The SMSF must be maintained solely for the purpose of providing retirement benefits to its member. However, using SMSF funds for personal gain or investments that don’t align with retirement goals can lead to compliance issues.

Solution – Always ensure investments are made with the sole purpose of benefiting members’ retirement funds. Regularly review the trust deed and ensure the fund’s actions align with the purpose of SMSF.

2. Failure to Comply with the Trust Deed

Mistake – The trust deed outlines the rules and regulations for how the SMSF should operate. Ignoring or not updating it when necessary can lead to non-compliance.

Solution – Review the trust deed regularly and ensure it is up to date with any changes in regulations or the trustee’s intentions. Seek legal advice from an SMSF expert when making changes to ensure they comply with current laws.

3. Failure to Monitor Compliance and Reporting Requirements

Mistake – Trustees sometime miss out on the ongoing compliance obligation of the fund like, Annual Audits, Tax Returns, and Financial Statements.

Solution – Set up a system to track key dates, such as when the annual return is due, and stay on top of reporting and audit requirements. It is wise to work with an experienced SMSF accountant who specializes in SMSF Compliance and reporting requirements.

4. Non-compliance with Investment Rules

Mistake – SMSFs have strict rules regarding the types of investments they can hold. The SISA clearly restricts SMSFs from investing in prohibited assets such as collectibles or Personal Use Assets including Artwork, Jewelry or Antiques, unless they are being used solely for the SMSF and kept separate from personal use.

Solution – Keep up with the investment rules under the Superannuation Industry (Supervision) Act (SIS Act). Avoid prohibited investments and ensure all transactions are conducted on an arm’s length basis, particularly, if dealing with related party.

5. Failure to Diversify Investments

Mistake – Some trustees fail to diversify the fund’s investments and put all or most of the SMSF’s money into one asset, such as property or a single share, which exposes the fund to higher risk and may not aligned with the fund’s investment strategy which must be reviewed regularly.

Solution – Ensure the fund’s investment strategy includes diversification across different asset classes (E.g. Shares, Property, Bonds) and regularly review the fund’s performance and strategy. This will help to reduce risk and maintain compliance.

6. Violation of In-House Asset Rules

Mistake – SMSFs have a strict rule limiting the amount of fund’s assets that can be invested in related party assets (e.g. Family members or businesses). Violating this rule can lead to heavy penalties.

Solution – Be cautious when investing in assets that are related to the SMSF members. Make sure the fund complies with the In-house asset rules (less than 5% of total assets).

7. Abusing Limited Recourse Borrowing Arrangements (LRBA)

Mistake – SMSF trustees sometimes make errors when using the borrowed money to invest in assets under Limited Recourse Borrowing Arrangements (LRBAs). If the rules surrounding LRBAs are not followed carefully, the SMSF can face penalties.

Solution – Ensure that any borrowing arrangements are in compliance with the specific rules surrounding LRBAs. Consult with a professional SMSF adviser to ensure the borrowing is appropriate for the fund’s investment strategy and that the terms meet the legal requirements.

8. Loan to Members

Mistake – Members (and their relatives) are prohibited from borrowing funds from their SMSF, including short term loans. Doing so will result in a breach of the Superannuation rules and hefty penalties can apply.

Solution – Some loans can be made to certain related parties (such as a related private company) subject to keeping the proper loan agreement in place and at arm’s length terms. Also, In-house asset rule must be followed and must not exceeds 5% of the total assets of the fund.

9. Poor Record-Keeping

Mistake – It’s important to keep detailed records of all transactions, including contributions, withdrawals, and investments. Poor record-keeping can result in compliance issues and penalties.

Solution – Implement a system to track all SMSF-related transactions. Work with an SMSF accountant to ensure proper documentation and timely reporting.

10. Underestimating SMSF Operating Expenses

Mistake – Some trustees underestimate the costs of managing an SMSF, including administration fees, accounting fees, and investment costs.

Solution – Evaluate all costs before setting up an SMSF and make sure that the benefits of running one outweigh the costs.

11.Poor Succession Planning

Mistake – Many SMSF trustees do not plan for what will happen to the fund when they are no longer able to manage it. This can cause confusion and financial strain for the beneficiaries.

Solution – Develop a comprehensive succession plan, including appointing an enduring power of attorney (if needed) and clearly stating what should happen to the fund in the event of the trustee’s incapacity or death.

12. Forgetting Minimum Pension Payments

Mistake – When a member starts drawing a pension, the SMSF is required to pay a minimum amount each year. Failing to do this can lead to tax penalties.

Solution – Make sure you are aware of the minimum pension requirements and track the payments to avoid underpayment.

13. Inadequate Member Insurance

Mistake – Some trustees fail to ensure that the SMSF has adequate insurance coverage for members, which can leave them exposed to risks in the event of sickness, injury, or death.

Solution – Regularly review the SMSF’s insurance policies to ensure that they meet the needs of all members. Consider life, total and permanent disability (TPD), and income protection insurance.

14. Not getting the right professional advice

Mistake – Trying to manage an SMSF without professional help can lead to costly mistakes.

Solution – Seek guidance from financial advisers, accountants, and auditors who specialize in SMSF  to ensure your fund is compliant and performing as it should.

15. Not Reviewing the Investment Strategy

Mistake – Not regularly reviewing and updating the SMSF investment strategy can lead to poor returns or failure to meet the fund’s goals.

Solution – Review and update your SMSF investment strategy at least annually to reflect changes in market conditions, members’ circumstances, or financial goals

Conclusion

By actively preventing these most common errors, trustees can efficiently operate their SMSF and ensure compliance. Collaborating with expert SMSF accounting firms and following best practices in investment management, record-keeping, and compliance will protect your self-managed super fund from unwanted risks or penalties.

Are you a SMSF Administrator, CPA firm or an Accounting Firm looking to offshore your Self-Managed Superfunds with experts who prioritize data security and provide comprehensive support in SMSF Compliance, SMSF Audit and SMSF Administration? Let’s talk!