• Start the new year with a bang by reviewing your SMSF’s investment strategy.
• Consider changing individual trustee to a corporate trustee, and ensure you have an enduring power of attorney.
• Don’t forget to review and update your estate planning and SMSF deeds.

With the ringing in of the new year, many of us would have made new resolutions. Often, they revolve around our personal health and wellbeing. This year, why not include your self-managed superannuation fund (SMSF) and give your fund a health check?

It is important to remember that your SMSF is not a set and forget structure and there are a few things that you should review and update:

1. Your fund’s investment strategy
2. Changing to a corporate trustee
3. Reviewing your estate planning
4. Reviewing and updating your SMSF deed
5. Putting in place an enduring power of attorney

1. Your SMSF’s investment strategy

Every SMSF is required to have a valid and compliant investment strategy.

The need for an investment strategy is not an ATO rule or requirement. It is in fact a statutory obligation set out in the superannuation law and regulations.

An investment strategy is required to consider several factors. Broadly, this includes risk, returns, liquidity (amount of cash held and ability to convert investments to cash), cash flow, investment composition, diversification including the risks from lack of diversification. Trustees are also required to consider whether to hold a contract of insurance for members and to note this in the investment strategy.

You should document your investment strategy that fulfills the requirements and goals of each member. Remember that each SMSF is different and my investment strategy may not work for you. Furthermore, it is not a standard minute or document that you sign off automatically each year with your accounts. 

Your investment strategy is a document you should be reviewing at least once a year and every time you make new investment decisions. Always consider the changing needs of the members and their circumstances, such as when they are near retirement or commencing a pension.

An investment strategy is not only an essential compliance document, it is also a helpful tool for trustees too.

If you want to grow your SMSF, you not only need a good investment strategy, but also regular reviews and benchmarking of your strategies. Below are a few questions you should regularly ask:

• Are your investments aligned with your accepted risk level and long-term goals?
• How liquid are your investments? Trustees must make sure that the SMSF holds enough cash to pay pensions, fund expenses and liabilities, whether this year and into the future.
• Is the income from your investments enough to provide for a positive cash flow? How quickly can you convert them to cash to address a shortfall?

Last year, the ATO as regulator embarked upon a compliance campaign, alerting some 17,000 SMSF trustees on their concerns regarding investment strategies. The targets of this campaign were SMSFs holding one single large asset such as property, many of which also having a limited recourse borrowing.

The ATO’s concerns were that either there was no investment strategy in place or that the trustees had inadequately addressed the low level of the diversification of their SMSF assets.

As part of this campaign, the ATO had also put SMSF auditors on notice. Investment strategies will therefore come under closer scrutiny by your SMSF auditor.

It is an important reminder to all SMSF trustees, that they must document, regularly review and if required, update their investment strategy. When reviewing your strategy, make sure you document this by way of a minute and keep this in your super funds’ records.

2. Changing to a corporate trustee

I am still surprised at the number of SMSFs I see that have individual trustees instead of a company. There was a time where this was a popular way to set up a new SMSF.

For a variety of reasons, over time we have seen an increasing number of new funds established with a corporate trustee. According to ATO statistics, around 80% of new funds established will have a corporate trustee. Despite this, across the SMSF population, around 40% still have individual trustees.

A common reason cited for using individual trustees is cost. Yes, it will reduce the establishment costs for your fund. However, this is a false economy.

When setting up a SMSF, the plan is that it will be with you for a long while – perhaps 20 or 30 years. If we take a long-term view and consider that cost over the life of the fund, the annual cost is very low indeed.

To maintain a company’s registration, you also need to pay an annual fee to ASIC. A standard company currently pays $267 a year. The fee for a special purpose superannuation trustee company is discounted to $54 a year. Further savings can be achieved by paying the fees for ten years in advance at a further discounted rate of $375.

Therefore, having a company trustee isn’t costly. There are a few good reasons to have a company as trustee for your SMSF. It can ease some administrative burdens and importantly, help to protect fund assets.

Any time an individual trustee is added or removed, a deed of variation is required. New bank accounts are needed, and the title of all the fund’s investments and insurance policies will need to be changed.

This can be a costly and time-consuming process.

Changing individual trustees when a loved one is seriously ill is the last thing you or your family want to be worried about. However, if you are unable to act as a trustee and your enduring power of attorney needs to be appointed, you will need to be removed as a trustee and your attorney appointed as a new trustee.

If you switch over to a company, similar administration will be required. However, that is a once off exercise. Going forward if you are adding or removing people, the changes occur at the director level of the company only. It removes the issues that arise with changing individual trustees.

SMSF trustees are required to hold the super fund assets separate from their own. A company provides a clear separation of ownership.

A super fund is a type of trust. This is important as the name of a trust will not always appear on the title of the assets it owns. Property is a prime example. In Western Australia, only the name of the trustees will appear on the property title. The use of a special purpose superannuation trustee company clearly identifies an asset as belonging to a superannuation fund.

A superannuation trustee company will need to have a special purpose constitution. It needs to include rules that it can only be a trustee of the superannuation fund. It cannot trade, invest or operate in its own right or act as trustee of a trust.  

I strongly caution against using the same company as your business or other interests. You need to ensure that the SMSF assets are clearly identifiable as belonging to the SMSF. The last thing you want to be doing is incurring legal fees in defending superannuation assets from creditors or disputes that may arise from the company’s other activities.

It also removes the risk of inadvertently adding non-SMSF members (or removing SMSF members) as directors. Over time your trading entity may wish to add or remove people associated with the business. If we have the wrong people as directors of the company, your SMSF will fail to meet the definition of an SMSF and risks becoming non-complying.

If something goes wrong and ATO trustee penalties are imposed, these are applied fully to each trustee. This is a personal liability of each trustee and results in a multiplying effect. For funds with individual trustees there will be at least two and up to a maximum of four trustees, with each separately charged the full penalty.

A company is a single trustee, regardless of how many directors there are. Only one trustee penalty amount would apply. Instead, each of the directors are jointly and severally liable to pay that penalty.

If you are looking to change to a corporate trustee, it is also a good time to have your SMSF deeds reviewed and updated. Often there can be a saving when undertaking these together, rather than attending to them separately at different times.

3. Review your estate planning

If you have a documented estate plan, well done! But when was the last time that you reviewed it? Personal circumstances and law changes could mean that your estate plan no longer aligns with your current wishes or is no longer achievable. More importantly, is it still valid?

Significant changes to the superannuation laws came into effect in 2017. These changes mean that many superannuation estate plans are now unable to achieve their original objectives or are no longer desirable in the new environment.

The other problem is that many death benefit nominations only have a shelf life of three years, meaning that they will expire and therefore will no longer binding on the trustee.

If you have a SMSF and your deed allows, non-lapsing nominations can be put in place. Like a will, it does not expire but can be cancelled and replaced. These can be beneficial where a member later loses the ability to make a new nomination due to illness or loss of capacity.

4. Review and update your deed

This then raises the question, have you had your SMSF deeds reviewed? When were they last updated? What are the fund rules on voting rights, estate planning, death benefit nominations and do they align with the current law?

Incorrect deed updates or variations along the way can render future deeds invalid. This means that the rules that apply to your fund may not be the ones that you think! This can be a big problem with estate planning.

If the last valid deed doesn’t allow for the type of nomination being made or the nomination is not accepted in accordance with those rules, you won’t have a valid nomination. Your nomination won’t be binding on the trustee.

Check to make sure that you have a full set of original, signed deeds, from the establishment of your fund and importantly, all the variations that have been made since. If you don’t, then you should seek legal advice on how you can remedy this in your circumstances.

One question I am often asked is whether a fund should update its deed every year. This is not necessary. In fact, it can sometimes cause problems if you don’t have a complete set of your deed updates. However, it is prudent to regularly have your deed reviewed and update when required.

5. Get an enduring power of attorney

Every SMSF member should have an enduring power of attorney (EPOA). What would happen if you are sick, injured or suffer a loss of capacity and are unable to act as a trustee of your fund? The rules for SMSFs require that all members are trustees or directors of the trustee company.

You can appoint someone to be a trustee/director on your behalf if they are your attorney under an enduring power of attorney. This will allow your attorney to be appointed to act as trustee or director in your place.

Loss of capacity is often discussed in the context of aging or older Australians. This is not just an older person’s issue. Sadly, I have seen many examples of younger people who have found themselves in life changing circumstances as a result of illness or injury. Life is unpredictable.

For your SMSF, having an EPOA alone is not enough. For the attorney to act, the trustee or director they are acting for needs to resign or be removed from that role. The attorney is then appointed in their place. You should have your fund trust deeds and trustee company constitutions reviewed to ensure they will allow for this to happen.

In conclusion

One thing is certain, when it comes to superannuation and SMSFs, things are constantly changing. It is therefore crucial that we keep tabs on our fund’s documents and strategies to make sure they still align with our goals, the superannuation law, are compliant and that they can do what we need them to do. If you haven’t reviewed your SMSF’s key documents and strategies for a while, take the opportunity to review them now while the new year spirit is still fresh.

Important Information:

Tracey Scotchbrook and Superology SMSF Advice Pty Ltd are authorised representatives of Sentry Advice Pty Ltd AFSL: 227748

The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.