SMSF vests a lot of power in the hands of its trustees, inasmuch as the trustees feel they have a lot of control over the investments they make and flexibility in terms of choosing which one they want to go for. Obviously, not all this comes that easy. Trustees need to stand on the right side of compliance and observe various SPAA and ATO restrictions.
Sole Purpose Test
The first thing that comes to mind is the Sole Purpose Test. It talks about SMSF being a retirement vehicle aimed at easing off the pressure of the post-retirement years. Another thing to keep in mind is that the members and trustees should not be in the line of direct benefits from the fund’s assets.
Related Party Transactions
Following the protocols of arm’s length transaction is just as crucial. Unethical related party transactions may be dealt severe penalties and the new penalty regime is going to be only stricter for the erring trustees. Any assets bought and sold from/to related parties must follow all the terms of commercial transactions. Not only should the purchase and sale be made at market value, but the income received should also be in sync with the true rate of return of the market (prevailing rate).
Fiduciary obligation to trustees
Trustees have a fiduciary (legal relationship of trust) obligation towards the fund members and in being so obliged, it is their duty to act responsibly and diligently towards the welfare of the fund members.
Predefined investment strategy
SMSFs are also obliged to stick to their predefined investment strategy and any diversion from the said practice can incur penalties. Geared unit trusts, loan to members, collectibles and artwork and investing money in employer sponsor (related) is disallowed.
In case you have some problem understanding your SMSF investments, feel free to get in touch with me.