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The SMSF pop quiz

There are many rules and regulations to comply with in running an SMSF. Kathleen Conroy provides a short quiz as a knowledge refresher for advisers and their clients.

There are quizzes on many subjects, from whether you are a good dieter to whether or not you have what it takes to make it as a captain of industry. Here is a short quiz about issues that may need addressing in the running of an SMSF.


Question 1.  A fund trustee can be remunerated from an SMSF in certain circumstances. YES or NO?

YES. The trustee cannot be remunerated for services provided as fund trustee, but can be paid for non-trustee services to the fund, such as legal or accounting services. The arrangement between the fund trustee and the fund should be properly documented and the payments should be made on an arm’s-length basis.


Question 2. Your client is 42 years old, self-employed and the sole member of his SMSF. His 10-year-old son has a life-threatening illness. He is constantly with his son so that his income for the past eight months has been, effectively, $0 per month. His son’s condition is being treated under the public health system and, thankfully, there is no delay or difficulty with the availability of that treatment. Your client is permitted to draw on the assets of the fund in this situation because the son is dependent on the client and his condition is life threatening, and/or because he has had no income for more than 26 weeks. YES or NO?

NO. There are two possible grounds for release considered here:

  • the compassionate grounds of a member or a member’s dependant suffering a life-threatening illness; and
  • severe financial hardship.

Where a member’s dependant is suffering from a life-threatening illness, this may be grounds for the release of fund benefits, but not (without limitation) where treatment for the condition is readily available through the public health system.

As to severe financial hardship, mere financial hardship (however severe) is insufficient to allow release. A member who has not reached their preservation age must also have been receiving an eligible commonwealth government income support payment continuously for at least 26 weeks and must be able to show they are unable to meet ‘reasonable and immediate family living expenses’.

In both cases, the release must be permitted under the deed for the fund.


Question 3.  Your client is the sole director of the trustee of his SMSF and its only member. He is also the sole director of the trustee of his family trust and its ‘primary’ beneficiary. Independent of the fund, his family trust has borrowed money to acquire real property. Down the track, the fund lends money to the family trust to assist it in making repayments under the loan. The loans are given at a commercial rate of interest and all are fully documented so there is no contravention of the Superannuation Industry (Supervision) (SIS) Act 1993 in the giving of the loan. YES or NO?

Possibly NO. Possibly no. According to section 65(1) of the SIS Act, a fund trustee must not lend money or allow the resources of the fund to be used to give financial assistance to a fund member or a relative of a fund member. Financial assistance covers both direct and indirect assistance. There has been no loan to a member or a member’s relative in this instance. However, there may have been the giving of financial assistance. A ‘red flag’ for financial assistance here includes where by being relieved from making the repayment, the trustee of the family trust was able to make a distribution to the member (in its capacity as beneficiary under the family trust).


Question 4.  Your client and his partner are the trustees of their SMSF. They have decided to change from individual trustees to a corporate trustee. To avoid the cost of incorporating a further company and to keep their ‘structures’ to a minimum, they decide to use an existing company as the trustee of the fund. Is this permitted? YES or NO?

Possibly NO. The law does not require that the corporate trustee operate solely as the trustee of the fund. There are, though, good reasons for limiting the trustee in this way. For example, if the arrangements with respect to the company’s other business change such that, say, it is necessary or prudent for one of the directors to step down, then there will be a contravention of the superannuation legislation if that director does, in fact, step down but remains a member of the fund. Further:

  • the company will need to ensure its records are diligently maintained to ensure a clear separation is at all times evident between the assets of the fund and the assets of the company held or acquired by the company in its own right; and
  • the members should consider possible exposure of the company’s other assets or disruption of its other activities as a consequence of any claim against the fund trustee or administrative action taken against the fund by the Australian Taxation Office (ATO).

Question 5.  The My Super Fund is an SMSF. By its deed, the trustee of the fund must at all times be a corporate trustee, and the fund rules are drafted such that this provision cannot be varied. The fund has two members, who are the directors of the fund’s corporate trustee, One Day Pty Ltd. One Day enters into a deed of retirement and appointment whereby it is replaced by the fund’s two individual members, A and B, and these individuals proceed to act as the fund’s trustee for several years. A and B subsequently enter into a deed varying the rules for the fund to allow “the fund trustee” to accept binding death benefit nominations from its members. B gives a binding nomination in accordance with the varied deed. A and B accept the nomination, and B then drops dead. Is the nomination binding on the fund trustee? YES or NO?

As the law presently stands, arguably NO.  It has been found that where an appointment is made other than in accordance with the terms of the deed:

  • that appointment is ineffective;
  • the trustee of the fund immediately prior to the purported appointment remains the fund trustee;
  • any subsequent attempts by the improperly appointed trustee to appoint a new trustee are invalid; and
  • if invalidly appointed, the purported trustee has no right to exercise powers under the trust deed.

If A and B were not properly appointed, they had no power to vary the fund deed. If the fund deed was not varied, the governing rules for the fund at the time of B’s death did not contemplate the giving of a binding nomination. If the fund rules do not permit it, the fund trustee is not bound by the direction of the member with respect to a binding nomination.

Question 6.  A fund has two members. One member dies. The deceased member’s legal personal representative may step in as trustee of the fund in place of the deceased member, but must step down as a trustee:

  • A: by the earlier of:
    • 28 days of the date on which probate is granted; and
    • six months from the date of death;
  • B: when all death benefits with respect to the deceased member are paid from the fund; or
  • C: when death benefits in respect of the deceased member begin to be paid from the fund.

A, B or C?


C. If the representative does not step down on the commencement of payment of benefits, the fund will cease to qualify as an SMSF. If the benefits are being paid in the form of a pension, the pension recipient is classed as a member and the ‘member-trustee rules’ will apply with respect to that recipient.


Question 7.  Max and Maxine are the trustees of the M & M Super Fund. They are going overseas for Maxine’s work for 18 months, will travel for a further three months and return to Australia before being away for two years. After two years, they decide to stay overseas indefinitely and make arrangements to sell their home in Australia. After another couple of months they change their mind again and return home. At all times, high-level decision-making for the fund was made by Max and Maxine wherever they happened to be, but day-to-day fund activities, for example, the investment of fund assets, was conducted in Australia. Max and Maxine are concerned they have fallen foul of the residency test for SMSFs. They are right to be concerned because:

  • A: They made high-level operational decisions for the fund outside of Australia for more than two years;
  • B: They allowed activities with respect to the fund to be conducted in Australia while they were outside the country;
  • C: The ATO really hates people holidaying overseas;
  • D: They changed their mind with respect to an intention to stay outside Australia for a period of greater than two years;
  • E: They sold their home;
  • F: They sold their home;
  • G: None of the above.

A, B, C, D, E, F or G?


Arguably G.  To be a complying fund, a fund must be an Australian superannuation fund. Broadly, there are three requirements that must be met for a fund to be an Australian fund (refer to section 295.95(2) of the Income Tax Assessment Act 1997). One of these is that “the central management and control of the fund is ordinarily in Australia”. The ATO’s view, which is not law, is that central management and control concerns “high-level operational decisions” (for example, updating the fund’s investment strategy) only, while the length of an absence overseas is not necessarily the problem – the issue, rather, is whether the absence was intended to be temporary or permanent. That issue of intention is determined by reference to the facts and circumstances at the time, a relevant but not determinative factor indicating permanent departure here being that Max and Maxine arranged to sell their home.

Question 8.

Your client’s fund is acquiring real property at market value from its own resources. The seller is your client’s son. Improvements on the real property include a cheese-making factory and a caretaker’s residence. The factory is operational, but has been closed for two months for an upgrade. When in operation, the caretaker’s residence is usually occupied during the week to facilitate the immediate rectification of onsite problems. The fund will likely not use the premises for cheese making in the long term. The fund:

  • A: is not permitted to acquire the property because the seller is a related party;
  • B: is not permitted to acquire the property because the property’s use may alter;
  • C: is likely permitted to acquire the property because, notwithstanding that the seller is a related party, the property is business real property;
  • D: is likely not permitted to acquire the property because the factory has been closed down for two months;
  • E: will be permitted to acquire the property provided that the caretaker’s residence is shut down;
  • F: none of the above.


A, B, C, D, E or F?


C.  As to the other options:

  • business real property may be acquired from a related party;
  • in an acquisition scenario, the relevant entity for determining the character of the property is the seller and the relevant time is the time of acquisition;
  • while the relevant time for determining the character of the property is the time the fund acquires an eligible interest in the property, all circumstances of the case are to be taken into consideration such that short-term closure for an upgrade will not be fatal to a business real property categorisation;
  • property may still be business real property notwithstanding that a part of it is used for residential accommodation;
  • without limitation accommodation both incidental and relevant to the conduct of the business is permitted.


Perfect score? If you did not score as highly as you expected – or if any of these scenarios led you to question some activities in your client’s fund – it would be prudent to revisit these scenarios right away. Far better to address any matter voluntarily than to do so because the regulator is knocking at your door … and the correct proper response to that comment is yes.

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