SMSF trustees can choose to do everything themselves (except the audit, as this must be done by an independent auditor), they can have service providers do nearly all of the work, or they may do some of the work but get assistance when it comes to accounting and tax matters.
There has been an unfortunate tendency by some service providers to make the recordkeeping and documentation more complicated than is really necessary. In some cases this can be because the service provider has a professional belief that if things are not done in a certain way their clients could be at risk. In other cases the extra documentation prepared can be a bit of smoke and mirrors to help justify a high fee.
An example of this is when an SMSF goes from accumulation phase to pension phase. There are some service providers that not only prepare letters and minutes to evidence that a pension has started, they also prepare a deed of pension or separate pension document. The ATO only requires the minutes and letters and the extra documentation could be regarded as window dressing.
In the final analysis it is up to the trustees to fully understand all of different administration duties, and decide how much or how little they will do themselves.
In some ways having an SMSF is very similar to owning and running a small business, but with a higher standard of recordkeeping imposed. Just as is the case for small business owners, the more regularly financial statements are prepared, and checked against what should have happened from both a financial and a compliance perspective, the greater the control and benefits that will be obtained.
The duties of trustees can be broken down into different time periods reflecting how often work is done. What follows are those duties split into their frequency.
Trustee duties are as follows:
- Day-to-day duties
- Monthly duties
- Quarterly or half-yearly duties
- Yearly duties
- Paying SMSF expenses
The day-to-day duties of trustees of an SMSF include the following:
- Receiving contributions, income, investment sale proceeds and rollovers.
- Making payments for investments, admin and compliance costs, benefits and rollovers.
- Completing documentation to make and sell investments.
- Keeping accurate accounting records that enable members' benefit statements and other financial statements and reports to be completed.
- Preparing and keeping minutes of decisions made during the year that affect the SMSF, its members and the trustees.
- Filing and retaining all documentation relating to the investment and administration of the fund, including information received from other super funds about members' benefits rolled into the fund.
This requirement to keep minutes is another area where some service providers take a minimalist approach, whereas others believe every decision made by trustees should be backed by a minute.
From a practical point of view a minute should not be required for every investment decision made by the trustees. To be on the safe side, the investment strategy minute for the fund could include a section that states: ‘The trustees are authorised to make all investments authorised by this strategy and no separate minute is required unless the investment involves a change in this investment strategy'.
In addition to these administrative requirements, trustees must also notify the ATO, on the appropriate form, within 28 days of changes to the following:
- the name of the fund
- the names of trustees
- the names of members
- the names of directors of a trustee company
- the postal or service of notices address of the fund
- the registered address of the fund.
If there is one area where trustees of an SMSF can decrease costs it is if they do their own bookkeeping and accounting. The number one rule in accounting is to make sure you balance and check your work as you go, and not leave it until the end. Imagine what a house would look like if checking measurements or dimensions were left till the end.
Often when well-meaning trustees try to do their own bookwork but without checking that it balances and is correct, it takes more time to find the errors than processing the whole year's work from the start. So be warned: if you plan to do the bookkeeping yourself make sure you are balancing your work back to the bank account and other independent sources as you go.
Also, to keep your work to a minimum utilise direct payment and receipt facilities offered by your bank and the different fund managers and companies you invest in. In some cases there may be a small fee, but time is saved and the chance of banking or paying an amount using the wrong account is minimised.
The simplest and cheapest form of recordkeeping trustees can use is the cash book method. All that is needed is a multi-column book. Instead of using a pen, use a pencil to write in the information. If a transposition error or other mistake is made it is a lot easier to fix.
One section of the cash book is devoted to receipts and the other to payments. To assist in checking that your figures balance when you have more than one bank account, a separate sheet should be used for each account. Where a cash book combines several sources of receipts or payments the job of reconciling is made that much harder.
For receipts the columns across the page could be:
In addition to writing the income banked in the amount column it is also written in the relevant type of receipts column. Depending on the number of columns the cash book has you can break down the types of deposits even further if required. The ‘Other' column can be used for less frequent deposits such as rollovers or for when investments are sold.
The secret of a cash book for a super fund is to make sure there are either enough columns or enough information shown in the detail column to enable contributions for each member to be calculated and income for each investment to be summarised.
For payments the columns across the page could be:
Fees & Charges
Just as with receipts the amount paid is written in the “Amount” column and the relevant payments column. Again if the cash book is big enough the investments could be broken up further into their different categories, and the ‘Other' column is used for one-off payments such as for an updated trust deed.
If the cash book method appeals there is one doctrine of accounting that you must follow, almost above all others. That is the doctrine of consistency. This means that you treat deposits and payments the same way each time. In other words, record the same payments or receipts in the same column every time, and don't change their treatment.
On a monthly or quarterly basis the amounts written for receipts and payments should be checked against a bank statement or a print out from an online banking service. The accuracy of the amounts shown will be checked. In addition, any direct payments such as charges, and direct deposits such as income transferred into the bank account, will be picked up and can be written in the relevant section.
The next step is to again either monthly or quarterly reconcile the total for receipts and payments shown in the cash book with the total shown by the bank or other financial institution. If the totals don't agree there is a mistake that must be fixed before going on. In addition, the total received or paid for the period shown in the “Amount” column should agree with the combined total of each of the different receipts or payments columns.
This method of bookkeeping should provide an accurate summary for the fund's accountant to process through his or her computer accounting system. It will also provide a means by which the trustees can relatively easily keep track of how the super fund is going income-wise, and more importantly keep a watch on how much is being contributed for each member so the limits are not breached.
If trustees can create more work for the fund's accountant by not keeping an accurately reconciled cash book, they can create even bigger problems when they use a computer package incorrectly. Again the secret of doing this properly is to regularly check and reconcile as much as you can.
Some of the popular business software packages, such as QuickBooks , MYOB and Xero, can be used by trustees to process their financial information. These simple packages will enable the trustees, if the information is recorded accurately, to keep track of many more investments and different types of contributions and members than using a cash book.
One of the advantages of the more advanced packages is that they receive data feeds electronically directly from financial institutions such as banks. This means the level of bookwork required is reduced and the chance of processing errors is reduced.
The secret to an efficient computer accounting package is the way the different accounts are set up. A small cost at the very start, of getting the super fund's accountant to help in setting up the accounts, can save greater ongoing costs and time than if the trustees try to do it all themselves.
These computer packages have the accounts divided into their main sections, these being income, expenses, current and non-current assets, current and non-current liabilities, and equity. Investments and bank accounts are set up in the assets section, income tax payable in the liabilities section, and members' accounts in the equity section.
The costs of these packages range from around $400 up to $700. The more support, training and updates trustees need the greater the cost. The old adage about computers, ‘garbage in garbage out', is applicable. These systems do require some basic understanding of finance and accounting, but for trustees who want to do as much as they can themselves, they can be a great help.
There are other computer accounting packages more specifically designed to do the accounting for an SMSF made available to accountants and other SMSF service providers. These packages not only look after the accounting side of an SMSF, such as the receipts and payments, they also help with the other duties and responsibilities of trustees of an SMSF. They can even automatically update the value of listed investments.
These packages are very sophisticated, to the point where they can:
- calculate taxable capital gains
- calculate tax payable by the fund
- calculate exempt pension income
- allocate income to members
- provide a comprehensive range of member and investment reports.
It is good practice for trustees of an SMSF to prepare a full set of reconciled accounts during the year. If this means getting the fund's accountant involved this may increase the administration costs for the fund. Offsetting the increased cost will be the ability of the trustees to more closely manage the investments of the trust, detect any compliance breaches in their very early stages, and take any corrective action required.
SMSFs registered for GST can be required to lodge quarterly BAS forms. If this is the case the trustees themselves, or the fund's accountant, will need to prepare the relevant reconciled accounts to determine what the income and expenses for the quarter are, and what GST has been collected or paid. Large super funds with commercial properties will be the main types of SMSFs required to register for GST.
Where a fund is in pension phase, or at times of extreme instability in the financial markets, reviewing the results and financial position of the fund can also provide major benefits. For a fund in pension phase a check can be done to ensure there will be sufficient cash to meet the future pension payments and any other payments to be made by the fund.
The secret to preparing fully reconciled accounts is the checking. First, trustees must ensure all of the day-to-day accounting entries have produced results in the accounts that can be verified. The sources of verification are bank statements, dividend notices and investment statements issued by fund managers.
The other checking involves looking at what transactions have occurred and ensuring everything is within the duties and responsibilities of the trustees, such things as ensuring all investments purchased are within the rules and the investment strategy of the fund. Also a check can be made of the amounts of concessional and non-concessional contributions to ensure the limits are not exceeded.
One of the main yearly duties of the trustees is to get all of the super fund's information together so the end-of-year statements and forms can be prepared. These include, where the trustees have not been maintaining a fully reconciled ledger system for the fund themselves, getting together all of the information the fund's accountant will need to do this work.
That information can include:
- bank statements
- dividend statements
- purchase documents for new investments
- tax statements and end-of-year reports for managed funds
- rental statements if the fund owns investment property.
Trustees of an SMSF should be particularly careful to provide all of the information needed for the accounts to be prepared and the audit conducted. Where trustees delay providing information to the auditor of the fund they will have breached the operating duties of a trustee. In this case they can find the breach is reported to the ATO, which could result in them and their fund receiving some unwanted attention from the ATO.
Once the yearly accounts are done, the trustees, the fund's accountant or a service provider must prepare the following statements and forms:
- statement of income and expenditure
- statement of financial position
- members' statements
- income tax return
- members' contribution statements.
As part of preparing the annual accounts for an SMSF, and also at times when a pension starts or a member requests benefits be paid out, the investments should all be shown at their current market value. For share, fixed-interest and managed fund investments the annual market value will be easily obtained. For other investments, such as property or collectables, the job of ascertaining the current market value is harder.
Trustees can obtain valuations from a qualified valuer, from suitably experienced real estate agents or experts in the investment, or calculate their own valuation based on available and supportable data.
The ATO does not require trustees of an SMSF to obtain a written valuation every year for investments where they can demonstrate that the market for that investment has been relatively stable and no adverse events, such as being damaged, have occured.
The trustees of an SMSF, in addition to the foregoing, must also on an annual basis:
- review the investment strategy of the fund and decide what it will be for the next 12 months
- appoint an approved auditor for the fund
- where the fund is in pension phase, ensure there will be sufficient cash in the bank account, or that the income of the fund when combined with the cash will be sufficient, to pay the pensions for the next 12 months.
Among the administrative duties of SMSF trustees is the requirement to pay fund expenses. These expenses include all of the operating costs of the fund and those associated with the investments of the fund. SMSF trustees cannot be paid for their work done as trustees.
Trustees can however be paid by the SMSF for work done for which they are properly qualified and experienced. For example an accountant that specialises in preparing SMSF accounts and tax returns could be paid, as long as the fee is commercial, for preparing the accounts and tax return for their own fund.
All expenses related to the operation of an SMSF should preferably be paid directly from the SMSF's bank account rather than paid by trustee/members. This is because in some circumstances amounts paid on behalf of the fund by members can be classed as a non-concessional contribution.
It is interesting to note that the ATO has warned SMSF trustees not to pay expenses on behalf of their SMSF, because it can lead to an excess non-concessional contribution problem, when superannuation legislation allows SMSFs to reimburse trustees for expenses they have incurred on behalf of their fund.
When a trustee of a fund does pay an expense on behalf of the SMSF it is important that, to avoid the chances of the payment being classed as a non-concessional contribution, the SMSF reimburses the trustee as soon as possible.
Some of the expenses that can be paid by an SMSF include:
- accounting fees
- audit fees
- legal fees
- investment advice fees
- investment valuation fees
- the annual return fee for corporate trustee
- travel costs for a trustee inspecting an SMSF investment
- office supplies
- life insurance for members
- property investment expenses
- subscriptions to investment magazines used by trustees to assist in the investment activities of the fund, and
- membership fees for the SMSF Survival Centre.
Care does need to be taken with expenses that have a dual purpose. For example if an SMSF pays for all of the paper and servicing costs of a printer, which is also used by the members for their personal or business activities, this would not be fair or reasonable. In addition the auditor of the SMSF could regard this as a breach of the regulations relating to members obtaining an immediate benefit.
For expenses that have a dual purpose between an SMSF and the members some form of a record should be kept to ascertain what percentage of the expense relates to the SMSF, and what percentage relates to the members. The SMSF would then be entitled to pay its share of the expenses.
If the trustees of an SMSF use an office in the member's home for long periods in performing their duties it would not be unreasonable, as long as adequate records are kept to establish how many hours of SMSF work is done in the office, for the fund to pay something towards the cost of power, light and heating of the office.
When a trustee is in doubt as to whether an expense should or can be paid by the SMSF there are two options:
- Contact the accountant for the fund and ask them.
- Contact the auditor for the fund and ask them.
The trustees of an SMSF must have a meeting or pass a resolution at least once a year. At the annual meeting, or in the annual resolution, the accounts for the fund are approved and any matters needing action, such as the investment strategy, are addressed.
Other meetings and resolutions that may be required during the year include:
- actioning a member's request to receive a benefit payment
- actioning a member's request to start a pension
- dealing with a request by a member to roll over benefits
- addressing changes in trustees, both individual and corporate
- changing the investment strategy for the fund.