SMSF trustees don’t always take all the right steps. It is but natural to fumble and flounder at times. Here are some of the errors SMSF often make — and thus, you should try to avoid.
1. Not checking the trust deed
While looking to borrow money using their SMSFs, trustees must first probe into their trust deed and figure out if such borrowing is possible. If it is a business premise the trustees wish to buy through their SMSF, they must first discuss the matter with the professionals available; after all, defaulting on such limited recourse borrowing options comes with a fair dose of penalties (often involving capital repayments, interest repayments and payment of a part of upfront fees).
2. Following arm’s length transaction where disallowed to do so
SMSF trustees cannot procure residential property from fund members. With related parties, they only kind of real estate they can sink their teeth into is a business premise or business real estate wherein the arm’s length transaction rules apply.
3. Not checking in whose name the assets are?
The assets held in an SMSF/investments made by an SMSF must be in the names of current individual or corporate trustees. If there are any changes in the trustees, ownership names must be duly amended in broking accounts, registers and managed funds.
4. Not going in accordance with the investment strategy?
While the strategy SMSFs may use for their investment is quite flexible, it is still wise to err on the side of caution when choosing investments. Going for investments which cannot be accommodated by SMSFs can lead to regulatory penalties. To purchase an asset that goes against the current investment strategy, SMSFs need to make necessary amendments to the strategy first. Something that SMSF trustees have erred in doing time and again!
There is no doubt that the SMSF is a superb financial vehicle. Yet, imagining that an industry without prudential regulations will allow its trustees to get away with anything may be unwise.