Sole Purpose Test
The objective of the sole purpose test is to ensure that SMSFs are maintained for the sole purpose of providing benefits to members upon their retirement or death benefits. As a trustee of the fund, you need to ensure that all decisions are made with this in mind, and that members do not receive any benefits from the fund prior to retirement.
Related Party Transactions
You need to ensure the fund does not transact with other members, members’ relatives or related entities of the fund. The definition of relatives is extensive and includes a child, parent, grandparent, sibling, aunt, uncle, great uncle, niece etc and former spouses. Other entities extend to partnerships, companies and trusts where members have control or majority ownership.
An in-house asset is a loan to, an investment in, or a lease with a related party of the fund, or in a related trust of the fund. As a trustee, you are restricted from lending to or investing more than 5% of the fund’s total assets in an in-house asset.
Arm’s Length Transactions
All investments in your SMSF must be made and maintained on an arm’s length basis. In other words, investments should be maintained on a strict commercial basis. The assets in the fund should always reflect the true market value for the asset.
Borrowings & Security
An SMSF is permitted to borrow money under a limited recourse loan arrangement following specific rules set out in legislation. This is a complex area and should be discussed with your financial adviser.
As a Trustee of your fund you are required to prepare and implement an investment strategy for your fund and regularly review it. It should be unique to the requirements of the fund and its members. You are required to ensure any investments in the fund are in line with the Investment Strategy.
Transfer Balance Cap
An SMSF needs to ensure the amount held in retirement phase doe snot exceed the Transfer Balance Cap. The amount of the Transfer Balance Cap starts at $1.6 million, and is indexed periodically in $100,000 increments in line with CPI.
Although there is a limit on the amount of assets an SMSF can transfer into a tax-free retirement phase account, this does not affect the amount of money that can be retained in the accumulation phase of an SMSF.
These rules are complex. It is imperative you seek advice prior to making investments via your SMSF unless you fully understand them (specific to your personal situation).
This is a brief summary of the key SMSF rules. For further information, click here.