A trustee's involvement
If you compare a person who drives to someone more accustomed to catching taxis or being chauffeur-driven, the differences are quite noticeable. The driver is required to know the road rules, consider potential roadblocks ahead, drive safely and be aware of their surroundings. The passenger simply has to trust their driver.
It's no different with SMSFs. The trustee is like the driver: he or she must be aware of the financial conditions, be responsible for all investment decisions and ensure the SMSF follows the rules.
Trustees must be involved in its day-to-day operations and make all decisions regarding the investment strategy. They must also be across the compliance and regulatory requirements of the SMSF. This strategy is then agreed to by all members. SMSFs will either have individuals acting as trustees or a company, and both have different structures.
The 'sole purpose test'
All SMSFs are required to undergo the sole purpose test, which determines whether or not a fund's only motivation is to pay retirement benefits to the trustees or their beneficiaries. This can be anything from aiming to reach a goal of having $800,000 at retirement, to being able to provide income of $50,000 per trustee once they hit retirement age. This test aims to protect trustees from making poor investment decisions that may harm the interests of the fund members.
Contributions and payments rules
Trustees must carefully monitor any contributions to the fund to ensure they do not exceed the limits for each financial year. They could be subjected to some pretty nasty penalties if they fail to do so. (The same penalties apply if you are in an industry or retail super fund.)
Another important point to consider is that a trustee can only access their super and receive payments from the fund once they meet certain conditions, for example, reaching preservation or retirement age.
This leads to another trustee responsibility: ensuring the fund is able to meet its payment obligations when required. This can be as simple as maintaining a minimum working cash balance within the fund or having investments that can easily be sold to meet minimum withdrawal requirements.
Investment strategies and the importance of actively managing them is discussed here.
Compliance is crucial
A major headache for many SMSF trustees is ensuring the fund remains compliant. There are certainly many rules and regulations to comply with and the penalties associated with failing to meet these rules can range from small fines to severe tax penalties on your SMSF. As trustee of the fund, you can perform almost all of the requirements to ensure your SMSF remains compliant. This includes developing and implementing investment strategies, managing payments and contributions, as well as preparing the annual tax returns for the fund.
Importantly, prior to lodging your annual tax return for your SMSF, you are legally required to have your fund audited by an independent, approved SMSF auditor each year. While you can appoint other people to assist in providing services to your fund, such as a financial planner or investment advisor, the ultimate responsibility and accountability for the running of the fund remains with you as the trustees. A brightday SMSF makes this easy for you.
As you are in the driver's seat of your fund, the onus is on you and the other trustees to abide by the rules of operating an SMSF, maintain compliance every step of the way and assume responsibility for all decisions made that affect the fund's performance.