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Self Managed Super Fund (SMSF) Article
SMSF Recordkeeping Requirements

By Tony Negline.

This article may be out of date.

1st June 2005

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Over the last few weeks there have been two important announcements involving super fund administration.

The first of these involves the record keeping requirements for investments held by Self Managed Super Funds; the second change deals with when super fund members aged at least 65 but under 75 must take their super monies either as a pension or lump sum during the 2004/05 financial year.

Lets look at investment record keeping first.  Under the super laws, SMSF trustees must document and minute all decisions concerning the operation of their fund.  Recently the Australian Taxation Office has clarified what records it expects trustees to have about their investment decisions.

Individual transactions within an investment category do not have to be documented in detail as long as any new investment fits within a fund’s investment strategy.  For example suppose an investment strategy says, “companies listed on an Australian Stock Exchange”.  If the trustee decides to sell shares in the XYZ company and purchase ABC shares, the trustees would only have to retain all transactional documentation and record this change in the fund’s financial accounts.

But what happens when a trustee wants to move from shares in XYZ to options or warrants in XYZ?  The answer to this question will depend on how an investment strategy is drafted.  Under the super laws, any super fund that wants to use derivative products must have a Risk Management Statement.  It is reasonable to assume that most super funds will only draft an RMS when they want to begin using these products and the RMS must be referred to in a fund’s investment strategy.  Therefore most super funds would probably need to document this type of change in a reasonable level of detail.

When a trustee wants to put some fund assets into a new investment category then that transaction does need to be recorded in detail and the investment strategy does need to be updated to reflect the reasons behind the change.

Most SMSF investment strategies are very broadly drafted.  A common example is, “Aussie Equities – 0% - 100%, Cash: 0 – 100%, etc”.  Personally I don’t think this is an investment strategy but that is another story.

Overall this is a good change by the ATO as it reduces the amount of work trustees need to do to run their fund.  The change is effective immediately even though these changes are not yet reflected in any of the guides or documents the ATO has published to help trustees run their super funds.

The second change involves a modification to the Preservation Standards and affects people who are aged at least 65 but under 75 and are not gainfully employed on at least a part-time equivalent basis (which means gainfully employed for at least 240 hours during the financial year that ended on the last occurring 30 June, that is, the most recently concluded financial year).  This is a reasonably recent rule and has applied since 1st July 2004.

Under this new rule if a super fund member fails it then their benefits have to be paid out immediately as either lump sums or pensions.  Further for members aged between 65 and 75, a trustee must make reasonable attempts to find out what those members gainful employment status is.  If a trustee cannot establish the gainful employment status then a member’s benefit must be paid out as either a lump sum or pension.

However the Australian Prudential Regulation Authority has recently modified these rules so that they do not apply between 1 July 2004 and 30 June 2005.

Importantly for investors APRA has also said that the old rule, which ceased on 30th June 2004, also doesn’t apply for the 2004/05 financial year.  People aged at least 65 but under 75 during 2004-05 don’t have to worry about satisfying work tests for that financial year in order to keep their super monies in the pre-retirement phase.

From 1 July 2005, super fund members will have to satisfy the new cashing rules which means they must satisfy the gainful employment test during 2004/05 and must communicate this fact to the trustee when they are asked to do so.

Take the example of Bill Smith who will turn 65 in January 2005.  He didn’t work during 2003/04 because he wanted to take some time off but did meet the new work test during 2004/05 and intends to continue working for the foreseeable future.  He doesn’t need his super assets because, for a few years, he can afford to live off his non-super assets and wants to leave his super in the pre-retirement phase.

If the current rules applied then he would have to take his super out as a pension or lump sum because he didn’t satisfy the work test during 2003/04.  However now that the new rule doesn’t apply until 1st July 2005 he will only have to make sure he satisfies the work test for 2005/06 – which means he must have met the test during 2004/05 – and beyond.

It is a pity that this rule change was not announced earlier because no doubt there are some investors aged at least 65 and under 75 who failed the new test and took their super monies out earlier this financial year.

The ATO have said that this rule change by APRA applies to SMSFs as well.

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