Many people are now discovering the flexibility of having a SMSF, but flexibility does not mean that SMSFs are easy to manage. The quality of this management is tested each year when the SMSF undertakes a compulsory audit to determine if it has complied with the Superannuation Industry Supervision Act (SIS). The majority of the time the audit results suggest that there are five common and easily avoidable mistakes which cause trustees the most pain.

David Sim, a self managed superannuation fund accounting specialist, and Principal of GiffardSim Accountants at Nowra, said that he has seen many trustees get caught out on the complex SIS requirements for self managed superannuation funds by not understanding the ground rules before proceeding with transactions.

Mr Sim said many of the costly and common self managed superannuation mistakes can be avoided. “The most common compliance breaches GiffardSim Accountants have found when auditing SMSFs can usually be avoided by a cautious trustee. Fortunately most mistakes can be easily fixed, but some trustees find themselves in a real mess which is not easily corrected.”

Mr Sim said the top five traps for SMSF trustees are:

1. Non superannuation expenses paid by the fund – this usually happens when the wrong cheque book is used to pay a bill, which is often not detected until the financial statements are prepared. The solution is to repay the amount plus foregone interest.

2. Investments are held in the incorrect name – this is a costly oversight, as many investment brokers will charge fees for changing the names in which an investment is held. The names investments are registered in should be confirmed when any investment is made or when trustees are changed.

3. No lease exists when a commercial property owned by the SMSF is being rented by a related entity - for this type of investment to be exempt from the in-house asset restrictions, a legally binding current lease must be in place at all times for when the commercial property is being rented by a related entity.

4. A closely held unit trust in which the SMSF has invested has lent money to other parties - this is a serious problem which impacts on unit trust investments established after 11 August 1999. If the unit trust was established after 11 August 1999 and loans exist in the unit trust, the whole investment can irreversibly become an in-house asset, which is potentially a major compliance issue for the fund. Advice should be sought immediately if you think your fund is in this situation.

5. The fund’s investment strategy has not been followed during the year. Investment strategies are a major area of focus by the ATO, who require auditors to assess the fund’s investment strategy as well as its implementation. Having to stick to an investment strategy does not mean that the fund cannot make the investments that it wants to make (within the legislated rules of investing for self managed superannuation funds), it simply means that any changes in investments need to be documented and the investment strategy updated if required.

While some of the common breaches are minor, all will need to be reported to the ATO by the trustee. Mr Sim said that a little more attention, as well as some proactive self education by trustees when your fund makes transactions, will save time and money.

Mr Sim said if trustees are in any doubt of the correct process, or would like specialised self managed superannuation accounting and audit advice they should contact him at GiffardSim Accountants.

<ENDS>