Understanding SMSF Core Rules and Regulations
If you want greater control over your super and more flexibility than you would get with a conventional super fund, then a Self Managed Superannuation Fund (SMSF) could be an attractive option.
However, they are more complex and also strictly regulated.
An SMSF is a superannuation fund that you manage yourself.
Most people have their super with a fund that is managed by a third party – a fund manager, a large corporation or an industry body. However, a growing number of people have decided to manage their own super funds which are known as SMSFs.
An SMSF provides retirement benefits for its members in the same way as any regular larger superannuation fund but there are some differences in how they are regulated by the government and how they are administered.
Stages of the fund
SMSFs can have members in either the accumulation phase, the pension phase or a combination of both.
Accumulation phase
- The accumulation phase of an SMSF is where the SMSF accumulates contributions and aims to grow your balance for future retirement needs.
- Each member has a specific balance in the SMSF and earnings are generally allocated in proportion to their interest in the SMSF.
Pension phase
- This is where the accumulated funds are used to provide an income stream for the member of the SMSF based on their individual balance in a pension account of the SMSF.
Key rules and regulations
The rules and regulations that govern SMSFs are stringent. The governing legislation for SMSFs is the Superannuation Industry (Supervision) Act 1993, commonly referred to as the SIS Act. Here are some key rules you should be aware of.
The sole purpose test
The sole purpose test requires that SMSFs are maintained to provide benefits to members upon their retirement, or to their dependants if a member dies.
As a trustee of a regulated superannuation fund, you must comply with the sole purpose test for the SMSF to be eligible for superannuation tax concessions.
The sole purpose test is divided into core and ancillary purposes.
A regulated SMSF must be maintained solely for either:
- One or more core purposes, or
- One or more core purposes and one or more ancillary purposes.
Core purpose
An SMSF must be maintained to provide benefits for each member of the SMSF on or after at least one of
the following:
- The member’s retirement
- The member reaching an age not less than prescribed in regulations
- The member’s death, if the death occurred before they retired, and the benefits are provided to their dependants or legal personal representative or both
- The member’s death, if the death occurred before they attained an age not less than prescribed in regulations, and the benefits are provided to their dependants or legal personal representative or both.
Ancillary purpose
Ancillary purposes for maintaining an SMSF are to provide benefits for members in the following circumstances:
- Termination of a member’s employment with an employer who made contributions to the SMSF for that member
- Physical or mental ill health
- Death of a member after retirement where the benefits are paid to their dependants or legal personal representative (LPR) or both
- Death of a member after reaching an age not less than prescribed in regulations where the benefits are paid to their dependants or legal personal representative or both&
- Another ancillary purpose is approved in writing by the regulator.
This allows an SMSF to provide benefits in situations of financial hardship and/or on compassionate grounds, subject to the SIS Act, the governing rules of the SMSF and the approval of the appropriate regulator.
How we can help
Understanding that managing your SMSF involves additional time requirements, learning and working with professionals is part of the duties of an SMSF trustee and a key part of providing for yourself and your family into retirement, while you plan to increase your investment returns to sustain the financial needs of your retirement.
Contact us for a confidential chat about your SMSF needs.
