Superannuation-Ch 10 (DIY Super)

BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?
> [10010] Self managed superannuation funds
WHAT IS A DIY FUND?

[10000] Overview of DIY super
The regulation of DIY superannuation funds has undergone substantial change in recent years. Small funds with fewer than five
members are categorised as either self managed superannuation funds (SMSF) or small APRA funds (SAF) with prudential
regulation by the ATO and APRA respectively.
There have been changes to rules surrounding investments in superannuation funds, many of which have particular importance
for DIY funds. The changes to the rules have come about due to the increasing popularity of these funds and the need to provide
a more specific framework in which they can operate. APRA statistics show that at June 2005 there were 310,901 funds with
fewer than five members from a total of 312,225 funds. Small funds had assets of approximately $169.2 billion that represented
nearly 22.8% of the total superannuation assets in Australia at that time. SMSFs accounted for 303,604 funds with assets of
approximately $165.6 billion. (Source: APRA Statistics Quarterly Superannuation Performance June 2005)
There are many reasons for the popularity of DIY funds, particularly with selfemployed individuals and small business owners.
The more prominent reasons include:
control over assets
broad investment choice including the ability to purchase business real property and lease the property back to the
members, and
estate planning purposes.
Throughout this chapter the following terminology will be used:
"SMSF" for self managed superannuation fund, as defined by SIS Act s 17A (10010)
"SAF" for small APRA fund a fund with fewer than five members that does not meet the s 17A definition (10020)
"DIY" for both SMSFs and SAFs collectively, and
"public offer and other" to denote funds other than SMSFs and SAFs essentially any fund with five or more members,
including master trusts.
[10010] Self managed superannuation funds

Although SMSFs offer flexibility, broad investment choice and control, there are many important issues that need to be
considered when deciding whether to establish or continue a SMSF not least of which are the responsibilities of trusteeship
that are imposed upon all members.
Before commencing an SMSF a person should obtain appropriate professional advice on the duties and responsibilities of a
trustee and consider the legislative and administrative obligations.
A SMSF is one that satisfies all of the following basic conditions (SIS Act s 17A):
it has fewer than five members
if the trustees are individuals, all members are trustees and all trustees are members (other than a singlemember fund)
if the trustee is a body corporate, all members are directors of that body corporate, and all directors are members (other
than a singlemember fund)
no member of the fund is an employee of another member, unless the members concerned are relatives, and
no trustee of the fund receives any remuneration in respect of duties or services performed as trustee of the fund.
If the fund is a singlemember fund, then it must satisfy the following conditions:
if the trustees are individuals, there must be two trustees, one of whom is the member and the other is not an employer of
the member (unless they are also relatives)
if the trustee is a body corporate it must have either:
a sole director who is the member, or
only two directors, one of whom is the member and the other is not an employer of the member (unless they are
also relatives), and
Copyright 2006, CCH Australia Ltd
> [10030] Differences: SMSF, SAF and Public Offer Funds
no trustee of the fund receives any remuneration in respect of duties or services performed as trustee in relation to the
fund.
See 10200 (steps in establishing a DIY fund) and 10310 (checklist for making investment decisions) for more details on
trustee requirements.
IMPORTANT POINT
The usual definition of "employee" is extended for the purpose of SMSF membership, so that a member who is employed by an
employersponsor of the fund may also be considered an employee of another person associated with that employersponsor.
The extended definition can include relatives, related companies, directors of the same company, trustees and beneficiaries of
the same trust, and partners in the same partnership.
This means that a fund will not be a SMSF if a member is employed by an employersponsor of the fund, and another member
(who is not a relative) is associated with that employersponsor. An example of this would be where the employersponsor is a
company of which another member is a director.
However, there are exemptions under the regulations (SIS Regulations reg 1.04AA):
directors of an employersponsor may be members of the same SMSF, and
if a member is both an employee and relative of another member, then they will not be taken to be an employee of any
other member of the fund.
Thus, the normal situation of a husband and wife in business is accommodated where they may both be members and
directors/trustees, notwithstanding that they are both employees of the employersponsor.
Acting trustees
A legal personal representative may act as a trustee or a director of a trustee company in a members place if the member (SIS
Act, s 17A(3)):
is under a legal disability
has provided an enduring power of attorney to the legal personal representative
has died (in this instance a legal personal representative may only act as trustee for the period from the members death up
to the commencement of the payment of death benefits).
If a member is under a legal disability because of age (ie a minor) and does not have a legal personal representative, the parent or
guardian of the member can be trustee in the place of the member.
An "acting trustee" can be appointed by the ATO where the ATO suspends or removes a trustee from a SMSF. A legal personal
representative of a person who is a "disqualified person" under SIS Act cannot act as trustee in that persons place (SIS Act s
17A(10)).
SMSF regulation
Small funds which meet the SMSF definition are regulated by the ATO and have specific exemptions and requirements under
the various provisions of SIS Act and the Tax Act see 10030 for a summary of these provisions.
[10020] Small APRA superannuation funds (SAFs)

A SAF is a fund that has fewer than five members, an APRA approved trustee or an RSE licensee. A SAF is not specifically
defined in the SIS Act. SIS Act s 17A and 121A require funds not meeting the SMSF definition to have an approved trustee or
an RSE licensee and be regulated by APRA. Generally, SAFs benefit from the same investment and administrative exemptions
granted to SMSFs.
An approved trustee is an independent trustee, approved by APRA under Pt 2 of the SIS Act, that meets relevant solvency,
capital adequacy and operational capacity requirements.
[10030] Differences: SMSF, SAF and Public Offer Funds

SMSFs, SAFs and Public Offer Funds share a common range of prudential and operational requirements and issues, eg. the sole
purpose test discussed in 10510. However there are also some key differences that must be understood before being in a
position to make an informed decision about whether to utilise a SMSF, SAF or a Public Offer Fund.
> [10030] Differences: SMSF, SAF and Public Offer Funds
SMSFs can be attractive due to perceived advantages over other types of funds, such as greater control, flexibility and
investment choice. The reality is, however, that in many instances Public Offer Funds offer features with the required level of
flexibility and choice, without the ongoing responsibilities and workload brought about by fund self management and
trusteeship.
The table below sets out the key differences in the regulation of SMSFs, SAFs and Public Offer Funds which should be
considered.
SMSF
Regulator
Public offer and other

SAF
funds
ASICconsumer protection; ASICconsumer
APRAprudential regulation protection
ATO
APRAprudential
regulation
Membership
Fewer than 5 members within

specific criteria (10010)
Fewer than 5 members, with not limited by legislation

no employer or relationship
criteria
May not be public offer

Trustee (SIS Act s 17A
and 121A)
Governing rules on
trustee obligations
All members are Trustees;
Corporation
Corporation
Corporation or individuals;
APRA approved trustee or

RSE licensee;
APRA approved trustee

or RSE licensee;
No remuneration
May be remunerated
May be remunerated
Exemption from requirements that:
Exemption from
requirement that trustee not
be subject to direction (SIS
Act s 58)
Exemption in regards to
binding death benefit
nominations (SIS Act s
59(1A)).
trustee not be subject to

direction (SIS Act s 58)
Exemption in regards to
binding death benefit
nominations (SIS Act s
59(1A)).
trustee not allow others to

exercise discretion (SIS Act s
59)
PDS not required if
member has all information
about the SMSF
(Corporations Act 2001 s
1012D(2A)).
Complaints and member No requirement for arrangement to
deal with internal enquiries and
protection (SIS Act s 42
complaints;
and 101 and
Superannuation (Resolution
of Complaints) Act s 5)
Management of the fund
Must have arrangement to

deal with internal enquiries
and complaints;
Must have arrangement

to deal with internal
enquiries and complaints;
No access to Superannuation
Complaints Tribunal (SCT);
Access to SCT;
Access to SCT;
No protection under culpability test.
Members protected under

culpability test.
Members protected under

culpability test.
Active participation by
members/trustee.
Trustee responsible.
Trustee responsible;
> [10040] Similarities SMSF, SAF and Public Offer Funds
Equal representation
provisions apply for
standard
employersponsored
funds.
Member directed
Yes within the terms of the
investment (SIS Act s
funds investment strategy.
52(4) and SIS Reg reg 4.02)
Yes within the terms of

the funds investment
strategy, although approved
trustee may impose
restrictions.
Exceptions from standard Acquisition of business real property Acquisition of business real
from related parties;
property from related
investment restrictions
parties;
(SIS Act, s 66, 67 and 69 to
85)
Small account and lost

members (SIS Reg reg
1.03A(2), Superannuation
(Unclaimed Money and
Lost Members) Act 1999)
Acquisition of listed
securities. However no
specific exemption, see
10560.
100% business real property;
100% business real

property;
Certain investments in related

nongeared trusts and companies.
Certain investments in
related nongeared trusts
and companies.
No benefit protection or reporting

requirements for these members.
Trustee must apply benefit

Trustee must apply
protection standards to small benefit protection
account balances;
standards to small
account balances unless
forfeited by member, eg
portability;
Trustee must report on lost
members and unclaimed
moneys.
Account records and

member reporting
(Corporations Act 2001 Pt
7.9 and Corporation
Regulations 2001 Pt 7.9)
Yes within the terms

of the funds investment
strategy, although trustee
may impose restrictions.
No requirement to provide a copy of No exemptions.

governing rules or audited accounts
to concerned persons on request;
Annual accounts do not require cash
flow statement;
No requirement to report specific
information on member accounts,
benefits and significant events.
(Corporation Regulations 2001
7.9.43, 7.9.45)
Trustee must report on

lost members and
unclaimed moneys.
No exemptions;
In addition trustee of
public offer fund is
subject to prescribed
rules on superannuation
interests under
Corporations Act 2001 Pt
7.9 s 1013D, 1017D,
1017DA and
Corporations Regulations
2001 Pt 7.9 Div 4 Subdiv
5.2 to 5.13).
IMPORTANT POINT
SAFs have the same exemptions from prudential requirements and investment restrictions as SMSFs.
[10040] Similarities SMSF, SAF and Public Offer Funds

There is a range of prudential and operational requirements and issues that are common across all funds, and which must be
considered in the DIY arena as much as in the public offer arena.
Sole purpose test
> [10040] Similarities SMSF, SAF and Public Offer Funds
Regardless of the type of fund, the superannuation fund must always be maintained solely for one or more of the core, or core
and ancillary, purposes. Generally, the fund must be maintained to provide benefits for members retirement or, in the event of a
members death, benefits for their dependants (SIS Act s 62; see 10510).
Trustee duties
In all cases, fund trustees must meet fiduciary obligations, as well as act in accordance with the trust deed, provisions of the SIS
Act and all statutory requirements imposed under tax, trust or other relevant law. A trustee may authorise another person or
entity to perform various activities related to the operation of the fund, but the trustee cannot delegate its overall responsibility
for those activities.
Trustees must always act honestly, in the best interest of members, and ensure that all trust assets are kept separate from the
trustees personal or business assets. There must be an investment strategy, and strict investment rules must be adhered to
(1040010420). Trustees must ensure information is available to members to enable a proper evaluation of the funds
management and financial condition there are also strict record keeping requirements. In addition, administrative obligations
such as annual returns, RBL reporting, PAYG and, possibly, GST payments and reporting must be met.
Efficiency
In order to manage any fund efficiently, trustees need to monitor fund performance, giving sufficient consideration to risk,
diversification, liquidity and the funds ability to discharge its liabilities a task requiring time and expertise.
Trustees need to keep uptodate with legislation and have the relevant financial and management skills as well as time to run
the fund effectively.
Professional service providers may be needed to prepare the trust deed, financial accounts, tax returns and audit reports, as well
as consultants, managers or brokers to assist with fund investments and benefit design.
Costs
Any superannuation fund costs money to run, and often the level of costs involved will be a function of the
flexibility/complexity of the fund, the type and number of investments held and the number of transactions undertaken. SMSFs
are subject to less onerous reporting and account keeping requirements (see 10030) so they may incur fewer costs of this
nature compared to SAFs or Public Offer Funds. Larger funds, however, may have increased scope for distributing costs and
achieving economies of scale in administration and investments for example access to wholesale managed funds. The
decision as to which is the most costeffective option for a client will require analysis of their particular situation.
EXAMPLE
EXAMPLE 10.1 DIY FUNDS
The seven partners of the prestigious law firm, Never Won One and Associates, have recently set up their own superannuation
fund, Life Is Easy Super Fund. The trustees are all of the individual partners. The partners are not related in any way except for
their partnership responsibilities.
The Life Is Easy Super Fund will not be a SMSF or SAF because it has more than four members.
EXAMPLE
EXAMPLE 10.2 SELF MANAGED FUNDS
Mr and Mrs Jersey run a milk bar. They have established their own fund called the Jersey Pasture Retirement Fund. The trustees
are Mr and Mrs Jersey. The fund has two other members:
their daughter, Daisy, and
Pat, who the Jerseys employ to work in the milk bar, and whose SG contributions go into the fund.
The fund will not qualify as a SMSF because Pat is an employee of another member (ie both Mr and Mrs Jersey) and is not a
relative of either. The fund will need to appoint an APRA approved trustee or RSE licensee to meet the SAF requirements.
BT Super Book> CHAPTER 10 DIY SUPER > COMPLYING AND NONCOMPLYING FUNDS
> [10170] Residency
COMPLYING AND NONCOMPLYING FUNDS

[10150] Complying fund status
A superannuation fund is a "complying" superannuation fund if it (SIS Act s 42 ):
is at all times an Australian resident regulated superannuation fund, and
no trustee of the fund contravened any regulatory provisions in relation to the fund or, if it has, the fund has not failed the
"culpability test", which basically requires all members not to have been aware of the contravention.
Assessing compliance: the "culpability test"
APRA can deem a fund, other than a SMSF, to be noncomplying if there is a breach of a regulatory provision. When
determining whether a fund is to be noncomplying, APRA must generally consider whether one or more members of the fund
had knowledge that the breach had occurred and, if so, whether the innocent members would be detrimentally affected by a
notice of noncompliance. APRA also has to consider the taxation consequences of the fund being made noncomplying, the
seriousness of the contravention and all other relevant circumstances. This is known as the "culpability test".
The ATO may deem a SMSF to be noncomplying under the SIS Act and for the purposes of Pt IX of the ITAA 1936.
IMPORTANT POINT
The culpability test does not apply to SMSFs such a fund may be deemed noncomplying if there is a breach of the SIS Act
or Regulations. Fund members knowledge of the breach or the impact of noncompliance does not need to be considered. This
is because all members of a SMSF must also be its trustees.
[10160] Implications of noncomplying status

Complying superannuation funds are taxed at 15% whereas noncomplying funds are taxed at 47%. Furthermore,
noncomplying superannuation funds have certain restrictions, including:
they cannot accept eligible spouse contributions, personal superannuation contributions or the government
cocontribution
contributions made do not count towards SGC
special CGT rules do not apply
they do not receive exemptions for income attributable to current pension liabilities
contributions made to a noncomplying superannuation fund are not tax deductible and all employer contributions made
on behalf of an employee or their associate will be subject to 48.5% fringe benefits tax.
If a superannuation fund changes from complying to noncomplying during or after the 1995/96 year of income, the fund will be
taxed at 47% of the market value of its assets less any undeducted contributions. This means the growth and assessable
contributions made in the current and previous years will be taxed at 47%, despite the fact that these contributions will have
been subject to 15% contributions tax (ITAA 1936 s 288A).
There are a number of circumstances in which a fund could cease to be a complying superannuation fund, including breaching
SIS requirements or becoming a nonresident superannuation fund.
[10170] Residency
As stated above, in order for a superannuation fund to be a complying superannuation fund, the fund must be a resident regulated
fund at all times during the financial year. This requirement can be an issue, particularly for SMSFs, where fund members move
or relocate overseas.
To satisfy the requirements as a resident superannuation fund, the fund must meet the requirements of ITAA 1936 s 6E(1):
the fund is a provident, benefit, superannuation or retirement fund at the relevant time, and
either the fund was established in Australia or any asset of the fund at the relevant time is situated in Australia, and
at the relevant time, the central management and control of the fund is in Australia, and
> [10190] Active member test
if the fund has at least one resident active member (ie the accumulated entitlements of active resident members is 50% or
more of the total accumulated entitlements of all active members of the fund).
The concepts of "central management and control" (see 10180) and "active members" (see 10190) are crucially important
for a DIY in meeting the residency requirement.
[10180] Central management and control

Central management and control of an entity is an important factor determining residency. In essence this central management
and control is where the trustee or director(s) of the trustee company meet to conduct its activity. The central management and
control requirements of ITAA 1936 s 6E(1) are extended by ITAA 1936 s 6E(1A), (1B) and (1C).
If the trustee or director of the trustee company is temporarily absent from Australia for a continuous period of no more than two
years and the central management and control of the fund would be in Australia if the trustees or director(s) remained in
Australia, the fund will continue to meet the residency requirement.
If the trustee or director is absent from Australia for a continuous period of more than two years, the fund will not satisfy the
residency requirement, unless the trustee or director returns to Australia for at least a 28day period before the two year period is
exceeded.
EXAMPLE
EXAMPLE 10.3 CENTRAL MANAGEMENT AND CONTROL
Jack and Jill are trustees of the Hill Superannuation Fund. During the year, Jack and Jill work overseas for four months.
As they are overseas for a continuous period of less than two years, the central management and control of the fund are deemed
to have been in Australia, and the fund therefore satisfies the residency test.
[10190] Active member test

Another requirement of the definition of a resident superannuation fund is that the total beneficial entitlements of any "resident
active members" of the SMSF are at least equal to 50% of the entitlements of all active members. If a superannuation fund
breaks the 50% "residency test", the fund will become noncomplying.
A member is an active member of the superannuation fund if, in respect of the year of income, either:
the member contributes to the superannuation fund for their own benefit, or
another person has made a contribution to the superannuation fund on behalf of the member.
A member of a superannuation fund is not an active member if:
they are not resident in Australia
they are not a contributor, and
the only contributions that have been made on their behalf since they ceased being a resident in Australia were made in
respect of a time when they were a resident.
This means that while the member is a nonresident tax payer, the member would not be regarded as an active member of the
fund if no contributions were made. The 50% test in ITAA 1936 s 6E(1)(d) is, in practice, relatively easy to satisfy since if a
person leaves Australia as a nonresident, the persons fund balance is ignored altogether, as the person is no longer an active
member.
EXAMPLE
EXAMPLE 10.4 ACTIVE MEMBER TEST
Mark, John and Harry are members of the Mojoh SMSF and are all Australian residents. Harrys employer makes a
superannuation contribution for Harry in July, and then in August Harry ceases to be a resident of Australia.
From that time on Harry is not a contributor to the superannuation fund and does not have any contributions made to the
superannuation fund on his behalf. He is therefore not an active member at any stage during the time in which he is a
nonresident.
In October a further contribution is made for Harry by the employer in relation to work that was carried out by him in July. As
Harry was still a resident in July, the period for which the contribution relates, this second contribution will still not cause Harry
to be a nonresident active member.
> [10190] Active member test
BT Super Book> CHAPTER 10 DIY SUPER > ESTABLISHING A DIY FUND
> [10200] Steps in establishing a DIY fund
ESTABLISHING A DIY FUND

[10200] Steps in establishing a DIY fund
The general process of establishing the fund is essentially the same for SMSFs and SAFs however there are differences,
particularly in relation to the appointment of trustees.
Step (1) Decide what type of fund is needed
See 10030 for details on the differences between a SMSF and a SAF and which one is appropriate for different situations.
This decision must be made at the start of the process, as it will impact upon the way in which the fund is constructed.
Step (2) Obtain a trust deed
The trust deed provides evidence of the existence of the trust, and sets out the rules of operation of the fund.
While "off the shelf" trust deeds are available from trustee companies and other organisations providing services to
superannuation funds, regard should be given to drafting a deed particular to the client. This ensures that the fund is able to meet
the clients particular needs. The following issues could be included in a trust deed:
whether the fund will be regulated under the corporations basis or the pensions basis (see below)
who will be a trustee of the fund
who can be a member of the fund
what investments the fund can make
the methods by which benefit entitlements are calculated
the circumstances in which contributions can be made (for example, to permit eligible spouse contributions, Government
cocontributions or inspecie contributions)
the circumstances and form in which benefit payments can be made to ensure that benefit payment criteria match
conditions of release in the SIS Act, or that benefits can be paid inspecie, or as a pension
flexibility of payment of death and disablement benefits, such as allowing them to be paid as pensions; and
the circumstances in which benefits may be forfeited in the fund and how the trustee may apply reserves created by such
forfeiture (see below).
the SIS Act applies to the fund despite any provisions in the trust deed (SIS Act s 7).
Corporations or pensions basis
In order to be a regulated superannuation fund and receive concessional tax treatment, a superannuation fund must have a trustee
and elect to be regulated under the Federal Constitutions corporation or pension powers (SIS Act s 19(3)). Accordingly, a DIY
fund will be a regulated superannuation fund if:
the trustee is a corporate trustee, or
the trust deed states that the sole or primary purpose of the fund is the provision of old age pensions.
IMPORTANT POINT
SAFs and public offer funds must have a corporate trustee (refer to 10030). If a SMSF has individual trustees, to be a
regulated superannuation fund, its trust deed must be drafted under the pensions basis.
Determining members benefit entitlements
An important inclusion in the funds trust deed is the way in which the trustee will determine the value of a members benefit.
This will ensure that there is no confusion or disagreement concerning how much is to be paid to a particular member when they
become entitled to a benefit. There are a number of ways in which this may be done, including:
By segregating the assets of the fund into pools attributed to different members. Then, all contributions, investment
earnings, taxes and benefit payments can be directly related to the relevant asset pool. Expenses that apply across the fund
may be apportioned between members and deducted from each members pool.
By aggregating the assets of the fund, and determining a method by which each members portion of those assets is
calculated. This may be by way of unit prices, or perhaps an account balance to which an investment earning rate is applied.
Forfeiture
Forfeiture clauses are generally inserted into trust deeds to protect members benefits in a number of circumstances, including
where a member becomes mentally unsound or historically where a member becomes bankrupt. Changes to the treatment of
superannuation benefits for bankrupts since 1 July 1994 have superseded the need for a forfeiture clause for this purpose (see
Chapter 13 for more details on bankruptcy and superannuation).
Another use of the forfeiture clause, known as the "forfeiture strategy", has on occasion been promoted and used in the
marketplace, predominantly for SMSFs. The strategy involves the fund trustee forfeiting a members benefits, often in excess of
the members RBL, to the funds reserve with the members consent. This reserve is subsequently reallocated to another
members account (often the spouse) where benefits are well within RBLs.
Minimum benefits have to be maintained in a superannuation fund until they are cashed, rolled over, or used to support an
income stream (SIS Regulations reg 5.08(1)).
From 12 May 2004 the use of forfeiture strategies for tax avoidance purposes by accumulation superannuation funds have been
prohibited by making all benefits in an accumulation fund "minimum benefits" (SIS Regulations reg 5.04(2)).
There are two new exceptions to the rules regarding the treatment of minimum benefits. These exceptions are to:
grandfather existing employee retention schemes where voluntary employer funded benefits only fully vest in an
employee after a certain period of employment. This exception only applies where there is a written agreement between the
fund member and their employer prior to 12 May 2004 (SIS Regulations reg 5.08(2)), and
enable a members minimum benefits to be cashed to provide for temporary incapacity where the amount is not
attributable to the members personal or employer contributions and their earnings (SIS Regulations reg 5.08(3)).
Temporary incapacity benefits can continue to be paid from an accumulation fund from voluntary employer funded or insured
benefits.
Covenants deemed included in the trust deed
The SIS Act (and Regulations) deem that a superannuation fund trust deed includes certain covenants, even if not specifically
stated. Any contrary provisions written into the funds trust deed will be overridden by these covenants. The covenants are (SIS
Act s 52):
acting honestly in all matters concerning the fund
acting with the same degree of care, skill and diligence as an ordinary prudent person dealing with property of another for
whom the person felt morally bound to provide in relation to the fund
ensuring that the trustees duties and powers are performed and exercised in the best interests of the beneficiaries
keeping the money and other assets of the fund separate from any money and assets of trustees and standard
employersponsors of the fund and associates
not entering into any contract, or doing anything else, that would prevent or hinder the trustee from properly performing
or exercising the trustees functions and powers
formulating and giving effect to an investment strategy that has regard to risk, diversification, liquidity, cash flow, and the
ability to discharge the funds liabilities
formulating and giving effect to an investment strategy and prudential management for the reserves of the fund consistent
with the entitys investment strategy and its capacity to discharge the funds liabilities, and
allowing a beneficiary access to any prescribed information or documents.
The governing rules of a regulated superannuation fund, which includes DIYs, must not permit those rules to be amended in
such a way that results in either the pensions basis or the corporations basis being contravened (SIS Act s 60; SIS Regulations
reg 4.05).
These provisions ensure that the fiduciary obligations of a trustee are not undermined by another party making amendments to
the rules of a fund to the possible detriment of fund members.
Trustee information requirements for members
The trustee of a superannuation fund is required to provide information to fund members. The information covered includes
information:
needed to understand benefit entitlements and the main features of the fund
to enable the person to make an informed judgement about a funds management and financial condition, and understand
the funds investments.

Specifically, a fund (other than a SMSF) must, on request, provide copies of the fund rules, its audited accounts and auditors
report, the most recent actuarial report and the most recent annual report (SIS Regulations reg 4.01 and Corporation Act s
1017C).
A number of requirements are imposed on trustees in relation to the disclosure of information to fund members and interested
parties. Trustees must, among other obligations:
provide members with information about significant events of the fund
provide leaving members with information about their entitlements
notify the regulator (ATO if a SMSF) of certain fund changes (eg contact details, or winding up)
lodge an annual tax return with the ATO as determined by the ATO, and
notify the regulator (ATO if a SMSF) of adverse events relating to the financial position of the fund.
Step (3) Appoint a trustee(s) for the fund
SMSF
The choice of who can be appointed as trustee of an SMSF is specified in s 17A of the SIS Act. Section 17A(10) prohibits the
appointment of a "disqualified person" as trustee of a fund.
An individual who is a "disqualified person" is ineligible to act as trustee of a fund or as a responsible officer of a corporation
that is the trustee of a fund. Such a person could therefore not be a member of a SMSF either. A disqualified person is one who:
has been convicted of an offence involving dishonest conduct, or
has had a civil penalty order made against them, or
is an insolvent under administration, or
has been disqualified by the regulator due to contraventions of the SIS Act or because the regulator believes the person
not a fit and proper person to be a trustee (SIS Act s 120, 120A and 121).
Note that if a "disqualified person" becomes a trustee of a SMSF or continues to act as a trustee of a SMSF after becoming a
"disqualified person", they could be subject to a penalty of two years imprisonment. Accordingly, all trustees of a DIY fund
should make an annual declaration that they are not a "disqualified person" within the meaning of s 120 and 120A of the SIS Act
and retain the declaration with fund records.
IMPORTANT POINT
A trustee that is an undischarged bankrupt (ie insolvent and under administration) is a disqualified person within the meaning of
s 120(1) SIS Act. Accordingly, the trustee must resign as trustee of the superannuation fund, and in the case of a SMSF, transfer
their benefit and cease membership (reference ATO ID 2002/977).
If the SMSF is to have individual trustees, consideration should be given to continuity of the fund should one of the trustees die.
While the SIS Act makes allowance for the legal personal representative of the trustee to act in their place until a benefit can be
paid, probate may be required before the legal personal representative can legally act. Use of a corporate trustee can help
eliminate this problem as the corporate trustee can have a sole director, however this may be a more expensive option as fees and
charges apply to establish and administer a company.
SAF
The SIS Act prescribes that the trustee of a SAF must be an approved trustee or RSE licensee (SIS Act s 21(2)(c)) (see
10020). Accordingly, when establishing a SAF, which approved trustee is being appointed must be considered. Information
on which approved trustees are eligible to act as trustee for a SAF is available from the APRA website, www.apra.gov.au.
Appointing the trustee
The appointment of the trustee(s) must be made in writing. It is also a requirement that a person cannot be appointed as a trustee
of a fund, or as the director of a corporate trustee of a fund, unless they have given their written consent to do so (SIS Act s 118).
Step (4) Elect to become a regulated fund
In order to receive the concessional tax treatment, a superannuation fund trustee must make an irrevocable election to be
regulated under SIS Act s 19(4)(6). A fund can only elect to become a regulated superannuation fund under the SIS Act if:
it has a trustee,
the trustee is either:

a constitutional corporation (ie company), or
a natural person and the trust deed provides that the sole or primary purpose of the fund is the provision of age
pensions, and
each trustee has given a notice to the ATO electing to be governed by the SIS Act regardless of whether the regulator of
the fund is the ATO or APRA (SIS Act s 19(4); SIS Regulations reg 1.04A).
Elections to be regulated must be made within 60 days after the fund is established by completing the ATO application form
"Application to Register for Superannuation Entities".
Step (5) Obtain necessary tax, ABN and GST registrations
The "Application to Register for Superannuation Entities" documentation contains the election to become a regulated
superannuation fund. The document also contains applications for a TFN, ABN and GST registration.
Registering for the GST
A trustee is required to register the superannuation fund for GST if the funds annual turnover exceeds $50,000 per year,
otherwise registration is optional. Note that annual turnover does not include input taxed supplies (eg contributions and most
investment income).
Where a fund has registered for GST it will be able to claim reduced input tax credits (RITCs) of 75% of the GST paid on the
acquisition of goods or services that are related to the making of a financial supply. The GST Regulations provide a detailed list
of those services that are reduced credit acquisitions that the fund is entitled to claim as RITCs. Where a fund has not been
required to register for GST, it may consider doing so voluntarily in order to claim back a refund for its RITCs.
There are a number of issues a fund should consider in determining whether it should voluntarily register for GST. The main
consideration should be whether the increased time and monetary costs associated with the additional record keeping and GST
reporting requirements will be greater than the RITCs the fund will receive (see 18200 for more details on GST).
Taxation advice should be sought by individual funds as to whether GST registration is necessary or desirable.
If the fund will be paying a lump sum or pension benefits, the fund must also register as a PAYG withholder, as it must withhold
PAYG tax from payments made to members.
Step (6) Establish a bank account for the fund
The assets of a regulated superannuation fund must be kept separate from the assets of the trustee personally or the assets of a
standard employer sponsor and their associates (SIS Act s 52(2)(d)). This is one of the covenants deemed to be included in the
funds trust deed. A breach of a covenant may result in an action by a member for loss or damage that occurred as a result of the
contravention. Accordingly, it is good practice to establish a bank account for the sole use of the fund.
When a trustee becomes aware of such an error, the trustee should immediately take steps to rectify the situation. Where the
trustee fails to rectify such an error immediately, they could be considered to have made a loan and potentially contravened
section 65 of the SIS Act (reference ATO ID 2002/516).
Step (7) Establish an investment strategy for the fund
The trustee is required to formulate and give effect to an investment strategy. Section 52(2)(f) of the SIS Act specifically covers
the trustees responsibility to formulate and give effect to an investment strategy that has regard to the whole of the funds
circumstances including (but not limited to):
the risk involved in making, holding and realising investments, as well as the likely return from the investments, having
regard to the fund objectives and expected cash flow requirements
the composition of the funds investments as a whole including the extent to which the investments are or are not
diversified and the associated risks of inadequate diversification
the liquidity of the funds investments having regard to its expected cash flow requirements, and
the ability of the fund to discharge its existing and prospective liabilities.
The investment strategy should detail the investment objectives and the methods to achieve those objectives. All investment
decisions made by the trustee should be made in accordance with the investment strategy.
The trustee should document the investment strategy, taking into account the requirements of SIS Act s 52(2)(f).
The investment strategy provides a framework by which the trustee will make all decisions relating to the investment of the
funds assets. Therefore, it is important that an investment strategy be formulated prior to the investment of any of the funds
money (investment strategies are considered in more detail at 10400 10420).

For further information and assistance in formulating and implementing the fund investment strategy, please refer to APRA
Superannuation Circular No II.D.1.
Step (8) Review trustee duties and responsibilities
A common issue identified by regulators is that many trustees of superannuation funds, particularly SMSFs, do not fully
understand the extent of the duties and responsibilities imposed by the SIS Act, SIS Regulations and the funds trust deed.
Before an individual accepts the responsibility as a trustee of a superannuation fund, it is important that they understand their
obligations, from both a fiduciary and an operational perspective. Whilst a trustee may authorise another person or entity to
perform various activities related to the operation of the fund, the trustee cannot delegate its responsibility and will be ultimately
responsible if there is a breach.
Step (9) Admit members to the fund
It is good practice that members should apply in writing to become a member of the fund and once admitted to the fund, the
trustee can accept their contributions and commence investment.
The trustee has an obligation to ensure that new members receive all information that the trustee reasonably believes they would
need for the purpose of understanding the main features, the management and financial condition, and the investment
performance of a fund (Corporations Regulations 2001 Part 7.9 Subdiv 5.6).
Whether the trustee of a DIY fund is required to provide a product disclosure statement (PDS) depends on the circumstances.
The trustee of a SMSF is generally not required to provide a prospective member with a PDS as the prospective member will
know or have access to the relevant information as a trustee.
Where it is reasonable to assume that the prospective member does not know or have access to information, a PDS may be
required. Furthermore, a PDS may also be required where the prospective member is not a trustee, as in the case of a SAF.
Where a trustee is not sure whether a PDS should be provided to prospective members, professional legal advice should be
obtained (Corporations Act 2001 s 1012D(2A)).
Step (10) Ensure ongoing reporting and record keeping obligations are understood and undertaken
The trustee of a superannuation fund has an obligation to report a range of information on a regular basis to members and
regulators. While some of this information may not be required until several months after the establishment of the fund, the
trustee should implement appropriate procedures so as not to overlook its reporting and record keeping obligations.
Ongoing reporting obligations include:
member information and fund information to members
annual superannuation fund return to the regulator (ATO or APRA as relevant), and
ATO RBL, benefit payment PAYG and surcharge (for contributions made up to 30 June 2005) reporting .
Record keeping
The trustee is required to maintain fund records. Accounting records that detail transactions, the financial position of the fund,
including the fund operating statements and annual statement of financial position, must be retained for a minimum of five years
(SIS Act s 111). Minutes of meetings and decisions, regulatory returns and information provided to members, must be retained
for a minimum period of 10 years (SIS Act s 103, 104 and 105).
BT Super Book> CHAPTER 10 DIY SUPER > MAKING INVESTMENT DECISIONS IN A DIY FUND
> [10320] DIY fund investments:
overview of the relevant law
MAKING INVESTMENT DECISIONS IN A DIY FUND

[10300] Providing retirement or death benefits
The core purposes of a regulated superannuation fund are to provide retirement benefits to members or death benefits to the
members dependants (SIS Act s 62(1)). The trustees of the fund also have the responsibility of acting in the best interests of the
beneficiaries of the fund (SIS Act s 52(2)). It is also a principle of trust law that trustees have a duty to invest trust property.
Taken together, these provisions require the trustees of a regulated fund to invest trust money to ensure adequate levels of
benefits are available to fund members or their dependants.
[10310] Checklist for making investment decisions

The following checklist provides a framework for ensuring that every investment decision is made in its proper legal context,
and that no inadvertent breaches of the SIS Act or other laws occur. Further details on the requirements of each checklist point
follow in this section.
Trustee delegates authority for investment decisions
Has authority for making investments been delegated by the trustee to another party? If so, is the investment made in accordance
with the terms of that delegation?
The trustee can delegate authority for certain activities to another party, however the trustee remains ultimately responsible for
the proper completion of those activities. Where authority is delegated in this way, it is important that the terms of the delegation
are clearly communicated to the other party and are monitored by the trustee on a regular basis.
Trustee undertakes investment decisions personally
Is the trustee responsible for daytoday investment decisions? If so, each of the following must be confirmed in relation to
those investment decisions.
Is the investment expressly permitted by the trust deed (10320)?
If the trust deed is silent on whether the particular investment is permitted, is it an allowable trust investment under the
trust law (10320)?
Is the investment in accordance with the requirements of the funds investment strategy (10400)?
Is the purpose of making the investment to further the retirement benefits of the members of the fund? If the trustee makes
the investment decision because of other reasons, the sole purpose test may not be met (10510).
Is it clear that the investment does not constitute financial assistance or a loan to the funds members and their relatives
(10530)?
Is the amount and type of the investment within the inhouse asset provisions of the SIS Act (10540)?
Is the investment transaction being undertaken on an arms length basis (10550)?
Is the investment being acquired from a nonrelated party? Assets may only be acquired from related parties in limited
circumstances (10560).
Have investment managers been appointed in writing (SIS Act s 124)?
[10320] DIY fund investments: overview of the relevant law

The investment activities of trustees are regulated by:
the trust deed and trust law, including the Trustee Act of each state and territory
the SIS Act and Regulations
the regulators and the courts, and
the funds investment strategy.
The trust deed and trust law
BT Super Book> CHAPTER 10 DIY SUPER > MAKING INVESTMENT DECISIONS IN A DIY FUND
> [10320] DIY fund investments:
overview of the relevant law
It is a principle of law that applies to trusts that trustees have a duty to invest moneys held by the trust fund. The trust deed of a
superannuation fund provides the authority for an investment to be made subject to exceptions in the relevant Trustee Act and
the SIS Act (see below).
Trustees must know their powers of investment and investment restrictions under the trust deed. Most trustees who come to grief
simply do not look at the trust deed of the fund that they are responsible for. A trustee who breaches the terms of a particular
trust deed will be liable to beneficiaries for damages in the event losses are suffered.
Trustees must also remember that investment decisions have to be exercised in a proper manner for the benefit of fund members.
This should be kept in mind when investments are made which could be considered speculative.
The Trustee Act
Each state and territory has a Trustee Act. The Acts are very similar but do vary between each state and territory. The Trustee
Act in each state and territory may authorise certain investments provided the investment is not prohibited under a particular
trust deed and it is not prohibited under the SIS Act. You should always obtain legal advice before relying on any Trustee Act to
ensure that no breach of trust occurs.
The regulators
It is the duty of the regulators of superannuation funds the ATO and APRA to ensure that trustees comply with the laws
under which they are regulated. As part of this process, both regulators regularly issue clarification and interpretation of their
views of the practical application of the laws. For example, APRA and the ATO distribute APRA Superannuation Circulars,
Trustee Newsletters and Guidelines as a means of communicating to trustees their approach to administering superannuation
laws. Trustees of DIY funds should be familiar with these publications and the views of the regulators on the various SIS
provisions dealing with fund investments.
The courts
It is possible for the trustee to apply to the court to approve an investment. The court (normally the Supreme Court of each state
and territory) has the power to approve applications for investments made by trustees. Due to the cost involved, this avenue is
normally only used where a significant issue is in question and the trust deed is silent or ambiguous.
The court will not authorise investments that are prohibited by the trust deed, the Trustee Act or other legislation. The court will
obviously take into account the impact upon the beneficiaries of that particular fund to ensure the investment is in their best
interests.
Another way in which the courts influence the investment activities of DIY fund trustees is by passing judgment on compliance
with the law as it relates to those activities in particular cases. A notorious example is the Swiss Chalet case, which is
summarised in Example 10.5 in 10510.
The SIS Act and Regulations
SIS sets down a number of:
covenants or standards that trustees are expected to follow (breaches of these covenants or standards can lead to criminal
sanctions or penalties or even a damages action if loss is suffered), and
restrictions on making certain types of investments and undertaking certain investment activities.
Covenants and standards
Certain covenants are treated as being part of the particular regulated superannuation funds trust deed. Regardless of whether
the covenants are actually written into the deed, they are deemed to apply (SIS Act s 52) see paragraph 10200 step 2.
Investment restrictions
The restrictions imposed by the SIS Act are both general and specific in nature, providing broad guidelines on a trustees
investment activities as well as particular prohibitions. These restrictions are dealt with at 1050010560.
BT Super Book> CHAPTER 10 DIY SUPER > INVESTMENT STRATEGIES
> [10420] Investment strategy: what to consider?
INVESTMENT STRATEGIES
[10400] The requirements
Investment of members entitlements by superannuation fund trustees is one of the most important issues affecting the
superannuation industry. The ability of superannuation fund trustees to make adequate returns on moneys invested by employers
and members is vital. The making of appropriate investments by superannuation fund trustees depends on a number of factors
including:
skill and knowledge of trustees
independent advice taken, and
the setting of adequate objectives and strategies.
As stated earlier, it is a SIS requirement that superannuation funds must formulate and give effect to an investment strategy (SIS
Act s 52(2)(f); SIS Regulations reg 4.09).
The trustee, in setting a strategy, must take into account the following:
risk and return the risk involved in making, holding and realising investments and the likely return from the
investments, having regard to the funds objectives and its expected cash flow requirements
diversification the composition of the funds investments as a whole, including the extent to which the investments are
diverse or involve the fund being exposed to risk from inadequate diversification
liquidity the liquidity of the funds investments having regard to its expected cash flow requirements, and
liabilities the ability of the fund to pay member benefits and other liabilities, both current and prospective.
A trustee could implement an investment strategy to invest in one class of asset, or even one single asset (say a property)
provided it could demonstrate it has considered the suitability of the strategy in light of the above issues.
[10410] Importance of investment strategies for DIY funds

Many people ask, "Why is it so important for a DIY fund to worry about an investment strategy?" After all, the members of the
fund are often all family, and in the case of a SMSF they are also all trustees.
The requirement to formulate and follow an investment strategy is a covenant deemed to be included in a funds trust deed (SIS
Act s 52(2)(f)). Any person who suffers loss or damage as a result of the conduct of another person engaged in contravention of
a covenant may recover the amount of the loss or damage by action against any person involved in the contravention (SIS Act s
55(3)). However, formulating and following a considered investment strategy is available as a defence to a trustee in the event of
claims for loss or damages due to particular investments (SIS Act s 55(5)).
Trustees are liable to a fine of up to $11,000 if they do not formulate an investment strategy (SIS Act s 34). Failure to formulate
an investment strategy can, in extreme cases, result in noncompliance for the fund, as the requirement to implement an
investment strategy is also a SIS operating standard. Therefore there is significant legal and financial incentive for a fund to have
a suitable investment strategy and to follow it.
[10420] Investment strategy: what to consider?

An investment strategy is simply a plan for making, holding and realising fund investments that reflects the funds objectives (eg
increasing the value of members interests) and circumstances. It is used as a means of pursuing one or more investment
objectives and is rarely concerned with individual investments. Rather, an investment strategy should be concerned with asset
classes. In establishing an investment strategy the following major factors should be taken into account.
Develop a fund profile. A fund profile is a summary of the fund itself. It should identify the facts, the characteristics and the
experience of the fund and its members. It should refer to the type of plan and how and when benefit entitlements are determined
and paid, including any reserving and insurance policies. It should also consider the profile of the funds membership, details of
the current assets of the fund and its anticipated cash flow, by way of contributions and benefit payments.
Develop investment objectives. This is the goal that the trustee wants to achieve. It can be expressed in a number of ways but is
normally some indication of the type or amount of return that the fund is trying to achieve. The trustee may establish different
investment objectives for different members.
BT Super Book> CHAPTER 10 DIY SUPER > INVESTMENT STRATEGIES
> [10420] Investment strategy: what to consider?
Set a strategy to achieve the investment objectives. This is the means employed to achieve the stated investment objective. It
should detail the types of assets that may be used to achieve the objectives and the asset allocation ranges and benchmarks.
Monitor the objective and strategy. The trustee should regularly monitor the performance of the fund against stated objectives.
This is one area which trustees of DIY funds do not generally focus on. It is important to measure the funds performance in
light of its investment objectives and market conditions.
BT Super Book> CHAPTER 10 DIY SUPER > INVESTMENT RESTRICTIONS
> [10510] Sole purpose test
INVESTMENT RESTRICTIONS
[10500] SIS Act imposes restrictions
The provisions of the SIS Act set down minimum standards for investments of a superannuation fund, mainly concentrating on
prescribing investments that a fund cannot invest in or applying conditions for a particular type of investment. The major
restrictions that SIS imposes are:
the sole purpose test (see 10510)
borrowing restrictions (see 10520)
the prohibition on lending or financial assistance to members or relatives (see 10530)
inhouse assets limits (see 10540), and
a requirement to make arms length investments (see 10550)
acquisition of assets from related parties (see 10560).
All of the restrictions above are classified as civil penalty provisions (SIS Act s 193) and can carry substantial civil and possibly
criminal penalties if they are breached. Penalties are imposed by the court upon consideration of whether there has been a
contravention and its seriousness (see 10800).
[10510] Sole purpose test

A regulated superannuation fund must be maintained solely for one or more "core purposes", or alternatively a core purpose and
one or more "ancillary purposes" (SIS Act s 62).
In brief, the core purposes are:
provision of benefits for members on or after retirement
provision of benefits to a member on or after the members attainment of a certain age (currently 65 per SIS Regulations
reg 13.18), and
the provision of benefits in the event of a member dying before retiring or reaching retirement age where those benefits
are paid to the legal representative and/or dependants of the member.
Ancillary purposes include:
provision of benefits on or after termination of the members employment
provision of benefits after the member has ceased work due to ill health
provision of death benefits to the legal representative and/or dependants of the member in the event of a member dying
after the members retirement from his or her occupation or after the minimum retirement age, and
other benefits approved in writing by the regulator.
The activities of a superannuation fund can be clear indicators of whether the fund complies with the sole purpose requirement.
Investments made may not be consistent with a longterm investment for the benefit of members of the fund. The sole purpose
test has traditionally been difficult to define and apply. What is certain though is that, if a transaction is entered into by a fund
with a motivating force other than the provision of retirement benefits for members, the trustee risks breaching the sole purpose
test.
EXAMPLE
EXAMPLE 10.5 SOLE PURPOSE TEST
An example of a fund that breached the sole purpose test can be found in Administrative Appeals Tribunal Case 43/95 95 ATC
374 (the socalled Swiss Chalet case). In this case, a superannuation fund made investments that indicated that the fund was not
being maintained for the sole purpose of providing superannuation benefits.
The fund, in this case, had members who were from the one family group plus nonmanagerial employees of the family
business. The nonfamily members were given virtually no information about the operation of the fund or their entitlements.
Member benefits were forfeited (see 10200 (Step (2) forfeiture)) to the fund and not paid to members. The fund purchased
assets including:
> [10520] Borrowing restrictions
shares in a company which came with the right to play golf and was used for private purposes
a Swiss chalet which was used by family members, and
a beach house that was used for personal family purposes.
The Tribunal considered that the fund had not been maintained for the sole purpose of providing superannuation benefits. This
was because, even though professional advice was taken about the assets and they had some income and growth potential, there
was also a purpose of providing benefits to the family group and their friends.
The decision in Swiss Chalet was recently applied by the ATO in ATO ID 2004/249. In ATO ID 2004/249, the SMSF invested
in art work, the art work was displayed in the home of a member at no cost to the member. The ATO determined that the work
of art displayed in the SMSF members residence at no cost to the member was a breach of the sole purpose test.
IMPORTANT POINT
While the regulators look closely at investments in assets such as beach houses, yachts, motor vehicles, artworks and other
collectables, technically a fund may be able to invest in such "exotic" assets. However, the trustees must demonstrate that they
have considered the purchase of the asset on its capacity to provide retirement benefits to members and its investment merits,
and that they consider it able to provide reasonable returns at a level of risk appropriate to the members of the fund.
Where a properly considered and soundly based investment provides "incidental" advantages to members, additional care must
be taken to ensure there is no suggestion that the fund is being maintained, in whole or part, for an improper purpose. For
example, the "exotic" assets could be stored in a storage room, facility or deposit box to make it a more acceptable investment.
Nonetheless, it would be prudent to limit the value of these "exotic" assets to a small portion of the total value of the fund.
[10520] Borrowing restrictions

A fund is prohibited from borrowing money, except in limited circumstances (SIS Act s 67). This restriction is to prevent
creditors from acquiring a claim over superannuation fund assets ahead of members and limit the exposure of superannuation
benefits to unforeseen risk. In addition, the SIS regulations also prohibit a trustee from giving a charge over or in relation to any
asset of the fund (subject to some limited exceptions) (SIS Regulations reg 13.14, 13.15 and 13.15A). Currently there are three
exceptions to the restriction against borrowing (SIS Act s 67).
(1) A fund trustee can borrow to overcome cash flow problems in the payment of benefits the trustee is required to make by
law or by the trust deed. Borrowings must not be for more than 90 days and must not be greater than 10% of the market
value of the assets of the fund (SIS Act s 67(2)). APRA has noted regarding liquidity that, "a need to borrow to fund
payments to beneficiaries would appear to demonstrate a lack of trustee diligence in meeting the investment strategy
requirements" (APRA Superannuation Circular II.D.4 para 9).
(2) A fund can borrow for up to seven days to settle securities transactions provided it was not likely at the time the
transaction was entered into that the borrowing would be needed and the total borrowings do not exceed 10% of the total
value of the market value of assets at the time of borrowing (SIS Act s 67(3)).
(3) A fund can borrow for up to 90 days in order to meet obligations under the superannuation contributions surcharge
regime. Total borrowings cannot exceed 10% of the value of the fund (SIS Act s 67(2A)).
Historically, it was relatively easy for funds to overcome the restriction on borrowing by using subsidiary unit trusts. Legislative
amendments made in 1999 prohibit these investments (10540 discusses this in further detail).
The regulators accept that certain liabilities and transactions do not constitute borrowings, as evidenced by the following
examples (APRA Superannuation Circular II.D.4):
a liability of the fund in relation to reimbursement of expenses paid by another party on behalf of the fund
liabilities arising due to normal commercial delays in the payment of expenses incurred by the fund, and
financial leasing arrangements and hire purchase transactions.
Derivatives
Derivatives are financial contracts that derive their value from an underlying asset, index or financial indicator and include
options, futures and warrants. The SIS Act does not prohibit the trustee of a superannuation fund from investing in derivatives
however there are compliance issues that must be considered.
The trustee of a superannuation fund is generally not permitted to create a charge over fund assets, however, a charge can be
created if it is in relation to a derivative and in accordance with the requirements of SIS Regulation reg 13.15A, only if:
> [10530] Lending money or providing financial
assistance to members
the charge is required to secure the performance of the trustees obligations in relation to the derivatives contract
the charge is required under the rules of the specified exchange, and
the investment to which the charge relates is in accordance with the trustees Risk Management Statement which must
outline the policies for use of the derivative, restrictions and controls and the compliance processes.
Derivatives should not be used for "speculation". APRA Superannuation Circular II.D.7. states that speculation can mean
different things to different people. The Circular defines speculation to mean investment activity which results in one or more of
the following:
the net exposure of the fund to an asset class (eg Australian equities) being outside the limits set out in the funds
investment strategy. (Net exposure is exposure taking account of both physical and derivative exposure.)
the risk involved for the whole portfolio being outside that which the trustees considered appropriate when they
developed and approved the funds investment strategy
the fund holding "uncovered" derivatives
the funds total portfolio being "geared up" through derivatives to circumvent the limitations imposed by s 67, 95 and 97
of the SIS Act on borrowings.
This area of superannuation investment is complex and trustees should seek specialist advice when considering derivative
investments.
Instalment warrants
On 16 December 2002 the regulators released guidelines covering investments in instalment warrants via shareholder
application. The regulators formed the view that an investment in instalment warrants via shareholder application normally
involves charging of a funds asset and, therefore, the regulators generally consider these types of investments as inappropriate
for a funds investment strategy.
As a transition to these new guidelines, the regulators will not take any action against trustees that have invested in instalment
warrants using shareholder applications before 16 December 2002 provided the transaction is finalised by 16 December 2003 or
at the next reset date, whichever occurs first.
There is generally no restriction on investment in instalment warrants by way of cash application, however, the regulators have
cautioned trustees that have invested, or are considering investing in instalment warrants that they must:
consider the appropriateness of instalment warrants in the context of the funds whole investment strategy
ensure that they are familiar with the risks involved in the use of instalment warrants and have in place adequate risk
management procedures to manage the risks associated with these investments prior to making the investment, and
ensure that an investment in a particular instalment warrant series does not constitute a borrowing or involve charging of
an asset.
[10530] Lending money or providing financial assistance to members

Trustees of regulated superannuation funds and their investment managers are prohibited from:
lending to fund members or their relatives, and
providing financial assistance using the resources of the fund to members or their relatives (SIS Act s 65).
These restrictions are designed to ensure the SIS preservation rules arent circumvented by preventing early access to fund
benefits.
The restriction on lending has limited exceptions. One exception allows a private sector fund (see SIS Act s 10 for a definition of
"private sector fund") established prior to 16 December 1985 to lend money to members (but not their relatives) if:
the trustee had, on or before 16 December 1985, an express power in the trust deed to lend money to members, or
the trustee had, on or prior to 16 December 1985, lent money to members and the governing rules did not expressly
prohibit that lending.
Amendments to the trust deed can only be made to reduce or remove the lending power.
The restriction on providing financial assistance to members or their relatives is certainly more complex. Where loans are quite
easy to identify, financial assistance is much harder to establish and arguably covers any assistance that improves the financial
position of a person.
> [10540] Inhouse assets
APRA has dealt with this issue in APRA Superannuation Circular II.D.2. The Circular identifies examples that would or would
not constitute financial assistance.
Examples of situations in the Circular that could be considered financial assistance are:
guarantees against trust property given by the trustee of the fund for the private loan of members, or
charging fund assets for the benefit of members.
Examples of situations considered in the Circular that do not constitute financial assistance are:
a fund investing on commercial terms in a nonassociated entity which, in its own right and from its own resources,
makes loans to members of the fund
the payment of benefits under the ancillary purpose provisions of SIS Act s 62, provided they are paid in accordance with
the SIS payment standards.
The term "financial assistance" is not defined in the SIS Act. The term has been considered in another statutory context. Part 2J.3
of the Corporations Act and its predecessors dealt with a company providing financial assistance for the acquisition of its own
shares. It is clear from the interpretation of this section that:
the financial assistance does not necessarily need to be of detriment to the company (ie it is not relevant that the fund
makes a profit on the transaction), and
the assistance can be direct or indirect.
Trustees of DIY funds must ensure that transactions entered into with members, or entities connected with the members, do not
constitute direct or indirect financial assistance. Trustees should make sure that any such transactions are entered into with
normal commercial terms and standard checks being undertaken and are consistent with the funds documented investment
strategy.
[10540] Inhouse assets

Subject to certain exceptions, inhouse assets of a fund are limited to 5% of the funds total assets. A superannuation fund is
prohibited from acquiring an inhouse asset if (SIS Act s 83):
the current market value of inhouse assets is greater than 5% of the total market value of assets in the fund, or
the acquisition would result in the market value of inhouse assets exceeding 5% of total market value of all fund assets.
An inhouse asset is defined as (SIS Act s 71(1)):
an asset of the fund that is a loan to, or an investment in, a related party of the fund
an investment in a related trust of the fund, or
an asset of the fund subject to a lease or lease arrangement between the trustee of the fund and a related party of the fund.
A "related party" is defined as a (SIS Act s 10(1)):
fund member
standard employersponsor of the fund, or
Part 8 associate (see 10560) of a fund member or employersponsor.
Exemptions to the definition of an inhouse asset include (SIS Act s 71(1)):
a life policy issued by a life insurance company
a deposit with an authorised deposittaking institution (ADI)
an investment in a pooled superannuation trust, where the trustee of the fund and the trustee of the pooled superannuation
trust acted at arms length in relation to the making of that investment
an asset which a regulator determines is not an inhouse asset of the fund
an investment in a widely held unit trust, and
property owned by the superannuation fund and a related party as tenants in common, other than property subject to a
lease arrangement between the trustee of the fund and a related party.
DIY funds receive the following additional exemptions from the inhouse asset rules:
business real property that is subject to a lease or lease arrangement between the trustee and a related party of the fund,
> [10540] Inhouse assets
and
investments in nongeared companies or unit trusts that meet certain requirements including (SIS Regulations reg 13.22C
and 13.22D):
the company or trust does not borrow or allow a charge over any assets
it does not invest in or loan money to individuals or other entities (other than ADIs)
it has not, since 11 August 1999, acquired an asset from a related party of the fund, or that was owned by a related
party in the previous three years (not including ownership prior to that date), other than business real property
it does not lease assets, directly or indirectly, to related parties other than business real property
it does not conduct a business, and
all transactions are on an arms length basis.
IMPORTANT POINTS
A small business owner with a DIY fund effectively has a choice of two options for the purchase of business real property:
through their DIY fund using the inhouse assets exemption on business real property or through their small business (whether
in their name or through their company or trust). A disadvantage with the first option is that no small business capital gains tax
concessions on the sale of the property will be available (as outlined in Chapter 8 on CGT exemption).
However, there may be an advantage in holding the property in the superannuation fund over a company, as no CGT discount is
available in the company and it can be difficult to get the sale proceeds out of the company in a tax effective manner.
The ability of a fund to invest 100% of its assets in business real property must be considered in light of the funds investment
strategy. Not only must the strategy permit investment in business real property, but the trustees must also have in mind the
issues to be considered in setting the investment strategy. The requirement to consider diversification of assets may seem in
conflict with the total fund invested in one asset. Such conflict has not been tested in the courts, and the views of the regulators
are not clear.
Consideration must also be given to funding the acquisition of business real property; note that a complying superannuation fund
cannot borrow (see 10520 borrowing restrictions).
Finally, if the fund has two or more members, investment in a single asset such as real property can be problematic when it
comes to paying benefits to members. In order to pay a benefit to one member, the asset may have to be liquidated, giving rise to
timing issues and potential tax liabilities.
Transitional rules
There are a number of transitional arrangements for superannuation fund assets existing prior to 11 August 1999 (the date
legislation was introduced to broaden the definition of inhouse assets) or between 11 August 1999 and 23 December 1999
(when the legislation received Royal Assent) (SIS Act s 71A71F).
Inhouse asset rules originally applied to the assets of a fund that were loans to, or investments in, a "standard
employersponsor" of the fund and limited to 10% of the fund.
An asset of a fund is exempt from the inhouse asset rules if, after 11 August 1999, the asset consisted of a:
loan or an investment made on or before 11 August 1999
loan or an investment made after 11 August 1999 which was made under a contract entered into on or before 11 August
1999
share or unit in a unit trust which was acquired on or before 11 August 1999, or
share or unit in a unit trust made after 11 August 1999 that was made under a contract entered into on or before 11 August
1999.
These exemptions only apply if the asset would not have been an inhouse asset before 11 August 1999.
Pre11 August 1999 leases and lease arrangements
A lease or lease arrangements between the trustee and a related party of the fund which commenced before 11 August 1999 and
continues to be subject to an uninterrupted sequence of leases and lease arrangements between the trustee and a related party is
exempt from the inhouse asset rules. Assets subject to leases or lease arrangements that are enforceable by legal proceedings
which were entered into before 11 August 1999 and which came into force afterwards are also exempt.
Reinvestments
> [10560] Assets acquired from related parties
Reinvested earnings are exempt from the inhouse assets of a fund if the fund had originally invested in a related company or
trust on or before 11 August 1999 and makes further investments of these reinvested earnings in the related company or trust
between 11 August 1999 and 30 June 2009.
However, any reinvested earnings after 30 June 2009 in the related company or trust will be considered an inhouse asset.
Geared investments
Any investment or loan of a DIY fund in a related company or unit trust made between 11 August 1999 and 30 June 2009 is
exempt from the inhouse asset rules if the total amount of the additional investments or loans does not exceed the amount of
the company or trusts liabilities (other than debts to the SMSF) as at 11 August 1999. This exemption only applies if the SMSF
had an investment or loan in the related company or trust as at 11 August 1999 and that was not an inhouse asset at 11 August
1999.
For a fund to use this exemption, a written election must have been made by 22 December 2000 stating that the fund intends to
use this exemption. If this election was made, no other exemptions will apply except those exemptions applying to leases and
lease arrangements.
If this election has not been made, and subject to the above exemptions, any additional investments in the related company or
trust are an inhouse asset from 11 August 1999.
Antiavoidance provisions for inhouse asset rules
The SIS Act has antiavoidance provisions to combat arrangements to artificially reduce the level of inhouse assets in a
superannuation fund. One antiavoidance measure allows a regulator to determine that an asset is an inhouse asset where there
is an arrangement in place to overcome the inhouse asset restrictions (SIS Act s 71(2), 71(4)).
Further, the regulator may determine that a person who is not a standard employersponsor of a fund may be taken to be a
standard employersponsor of a fund, and therefore a related party (SIS Act s 70A(1)).
Another measure is the prohibition of schemes designed to artificially reduce the market value ratio of a funds inhouse assets.
If a scheme was entered into with the intention of avoiding the application of the inhouse asset rules, it is treated as a civil
penalty provision (SIS Act s 85).
[10550] Arms length investments

The trustee of a superannuation fund must conduct all its transactions on an arms length basis. This means that all transactions
must occur and be maintained at market value by which a willing seller and a willing buyer would be likely to apply on an open
market on a commercial and objective basis (SIS Act s 109).
[10560] Assets acquired from related parties

Section 66 of the SIS Act prohibits a regulated fund from intentionally acquiring an asset from a related party of the fund.
Furthermore the antiavoidance measures prohibit the trustee from acquiring an asset belonging to a related party being acquired
by the fund via an interposed company or trust.
A "related party" of the fund is any member or standard employersponsor of the fund and any "Part 8 associate" of either. "Part
8 associates" include relatives, other members of a DIY fund, trustees of the fund, business partners and their spouses and
children, and other controlled or controlling entities (SIS Act Pt 8, s 70B, 70C, 70D and 70E).
The regulators view the term "asset" in s 66 of SIS Act to mean any form of property including money, real property (eg house
and land) and personal property (eg a boat, work of art or copyright ownership) (reference APRA Superannuation Circular II.D.3
para 9).
The APRA Circular also states that the prohibition is not restricted to acquisitions of assets, which occur only as a result of a
purchase and envisage any means by which the trustee becomes the legal or equitable owner of the asset would constitute an
"acquisition". The intentional transfer or assignment of assets from a related party to the trustee of a fund, such as a life
insurance policy acquired from a member of the fund is also subject to the prohibition (APRA Superannuation Circular II.D.3
para 10). This prohibition also applies to assets acquired as a result of an inspecie contribution.
These asset acquisition provisions contain a number of exceptions allowing a fund to acquire certain assets from related parties,
including assets:
listed on an approved stock exchange and acquired at market value (see 10600), or
business real property (see 10600), or
> [10560] Assets acquired from related parties
acquired under a merger between complying superannuation funds, or

the acquisition of the asset would not result in the level of inhouse assets of the superannuation fund exceeding 5% of
the total fund assets (SIS Act s 66(2A)).
BT Super Book> CHAPTER 10 DIY SUPER > INSPECIE TRANSACTIONS
> [10600] Inspecie contributions
INSPECIE TRANSACTIONS
[10600] Inspecie contributions
Members and other related parties may make inspecie contributions to a fund using the following assets.
Listed securities
Listed securities can be acquired from a member provided market value is attributed to the asset (ie if the acquisition was an
inspecie contribution then the security should be recorded at market value at the date of transfer).
A listed security is a share, unit, bond or debenture, right or option or any other security listed for quotation on the official list of
a licensed market in Australia (eg a stock exchange of Australia), an approved stock exchange listed in ITR 1936 Schedule 12 or
an exempt exchange under Corporations Act 2001 s 791C.
Business real property
Business real property includes any:
freehold or leasehold interest of the entity in real property
interest in Crown land that is capable of assignment or transfer and is not a leasehold interest, or
class of real property prescribed by regulations
where the real property is used wholly and exclusively in one or more businesses, whether carried on by the fund or not.
Business real property does not include any interest held in the capacity of beneficiary of a trust estate (SIS Act s 66(5)).
The businesses do not have to be operated by the related party from whom the fund is acquiring the asset.
The question of what constitutes business real property can depend upon the facts of the particular case, and APRA
Superannuation Circular II.D.3 paragraph 20 provides some clarification:
"Property that meets this definition includes land on which business is conducted (eg shop or factory) and land that is the
subject of a business (eg land held by a property developer for development or redevelopment, or in the process of being
developed or redeveloped). The question of whether rental property owned by a related party is business real property
that can be acquired by the trustee will depend on the facts of the case. Generally speaking, a single residential rental
property will not be treated as business real property unless it forms part of a business of owning and leasing residential
property."
"Business" includes professional services and primary production (which specifically allows a farm to be classed as business real
property, even where part of the farm contains a private home) (SIS Act s 66(6)).
Inhouse assets
SIS allows the trustee of a superannuation fund to invest a certain percentage of the funds assets in inhouse assets. The trustee
can acquire from a related party any investments that can be held by the fund under the inhouse asset rules, provided the
acquisition is at market value. Therefore, if the investment is an inhouse asset or is subject to the transitional arrangements in
SIS Act Pt 8D or is covered by any of the exceptions in SIS Act s 71(1), the investment may be acquired from a related party
(10540).
Assets transferred to a superannuation fund as inspecie contributions must always be transferred at current market value.
IMPORTANT POINT
Where business real property is transferred into a DIY fund as a deductible employer contribution, rather than as a cash
contribution, the inspecie contribution is likely to attract fringe benefits tax. The exemption for deductible contributions under
the Fringe Benefits Tax Act 1986 only exists where the contribution is in the form of "money" (FBTA Act s 136(1), definition of
"fringe benefit").
TIP
SIS Act s 71(1)(h) provides an exception to the inhouse asset rules for investments in widely held trusts. As s 66 allows a fund
to acquire assets of this nature from a related party, a clients managed funds could be used to make inspecie personal
contributions to their DIY fund.
EXAMPLE
BT Super Book> CHAPTER 10 DIY SUPER > INSPECIE TRANSACTIONS
> [10630] Other considerations
EXAMPLE 10.6 INSPECIE CONTRIBUTION

Roberto is selfemployed and has an SMSF. He owns 5,000 units in a managed fund with a current market value of $10,000 and
would like to transfer the units into his SMSF. Roberto originally paid $5,000 for the units.
To enact the transfer, a Transfer Form must generally be completed indicating the superannuation fund trustee as the buyer. The
acquisition of the asset as an inspecie contribution should be recorded in the minutes of the trustee.
On transfer of the managed fund units, a capital gain of $5,000 is created (indexation and CGT concessions are ignored).
Note: In some states and territories, stamp duty may be payable.
Roberto may claim a tax deduction of $8,750 on the $10,000 contribution ($5,000 + 75% of remaining portion). This will
effectively offset the $5,000 capital gain plus $3,750 of other assessable income for Roberto in that financial year.
Contributions tax of up to $1,312 will be payable in the fund ($8,750 15%).
[10620] Inspecie benefit payments

DIY funds can offer substantial flexibility in benefit payment options and strategies. The degree of flexibility and control
afforded by DIY funds means eligible termination payments could be paid to members (or their beneficiaries) in specie, ie with
assets other than cash. However, care should be taken when making inspecie benefit payments to ensure that the transaction is
completed on an arms length basis (SIS Act s 109) and the sole purpose test is not breached (SIS Act s 62), particularly where
unusual investments are involved (see 1050010560 for detail on restrictions on investment transactions).
Some public offer Master Trusts are also able to make inspecie benefit payments.
[10630] Other considerations

In addition to the trust deed, SIS Act restrictions and the FBT issues in making inspecie contributions, the contributor should
also consider the following issues:
Stamp duty depending on the relevant jurisdictions stamp duty laws, stamp duty may be payable on the inspecie
asset transfer
CGT implications because there is a change in ownership of the inspecie asset from the member or employer to the
superannuation fund trustee, a capital gains tax event arises and there may be CGT implications.
BT Super Book> CHAPTER 10 DIY SUPER > FUND RESERVES
> [10660] How do reserves work?
FUND RESERVES
[10650] What are reserves?
Reserves are amounts set aside within a superannuation fund. They are unallocated moneys and do not form part of any
individual members account and may build up in value over time. Superannuation funds can maintain reserves if their trust deed
allows it.
If the trustee intends to maintain reserves, SIS Act s 52(2)(g) states:
"if there are any reserves of the entity to formulate and to give effect to a strategy for their prudential management,
consistent with the entitys investment strategy and its capacity to discharge its liabilities (whether actual or contingent)
as and when they fall due."
The trust deed determines what types of reserves are allowed and how they can be used. If reserves are used, the trust deed must
not have a provision prohibiting the maintenance of reserves (SIS Act s 115).
The funds allocated to reserves can arise from the following:
unallocated contributions (see Important Point below)
undistributed investment earnings
forgone or forfeited benefits (minimum benefits cannot be forfeited; see 10200, step 2)
transfer of reserves from another fund.
IMPORTANT POINT
From 12 May 2004 trustees of accumulation superannuation funds that receive a contribution in a given month are to allocate
that contribution to a member of the fund within 28 days after the end of the month or, if it is not reasonably practicable to do so,
within a longer period as is reasonable in the circumstances (SIS Regulations reg 7.08).
It should be noted that this will not prevent the transfer of administration costs from an administration reserve account provided
the contribution is first allocated to a member of the fund.
EXAMPLE
EXAMPLE 10.7 INVESTMENT RESERVES
A twomember superannuation fund has $800,000 in assets. Each member has a 50% beneficial interest in these assets.
If the actual investment return of the fund is 10% (ie $80,000), and the trustees determine a crediting rate of 5%, then the
members will have 5% (ie $20,000 each) credited to their accounts. The remaining 5% ($40,000) is allocated to the investment
reserves.
These reserves can be dealt with at the trustees discretion subject to the trust deed.
[10660] How do reserves work?

The division between members accounts and any reserves is merely a bookkeeping distinction that is, the funds do not need
to be physically separated.
When there is an allocation from a reserve to a members account, an assessment by the trustee must be made to determine
whether the allocation was fair and reasonable as between all the members of the fund (SIS Regulations reg 5.03(2)(a)). When
determining whether an allocated amount exceeds a reasonable amount, the trustee must have regard to:
the amounts paid by or for the member of the fund
the funds investment earnings relating to the members interest in the fund, and
any other relevant matters.
Any allocation of an amount from a reserve that is not reasonable is referred to as an "allocated surplus amount".
The use of any reserve must take into account the general antiavoidance provisions contained in ITAA 1936 and ITAA 1997.
BT Super Book> CHAPTER 10 DIY SUPER > PAYING PENSIONS FROM A DIY FUND
> [10700] Retirement income streams
PAYING PENSIONS FROM A DIY FUND

[10700] Retirement income streams
An increasingly popular reason for the establishment of DIY funds is as a vehicle to provide a retirement income stream for the
members of the fund. SMSFs and SAFs may pay an allocated pension, complying pension, or other (noncomplying) term or
lifetime pension.
Often, many of the reasons individuals have for establishing a fund in this way are similar to their reasons in establishing a DIY
fund for benefit accumulation (10000). A main advantage of using a DIY fund to pay a pension is the continuity available for
members; assets remain intact when the member moves into retirement so there is no need to roll over the benefit to an income
stream product on meeting a condition of release.
Allocated pensions
Allocated pensions are perhaps the most common type of pension paid from DIY funds, providing for a market linked account to
be established to back a members retirement income stream. As with allocated pensions offered by retail superannuation funds,
a DIY allocated pension may invest in a broad range of asset classes.
Since 1 July 2000, investment by an allocated pension in Australian equities has increased in taxeffectiveness, as any unused
imputation credits arising from investments backing a pension will be refundable to the fund. Previously, these credits were lost,
unless the DIY fund had sufficient unfranked income, or also had members still in the accumulation phase able to utilise the
imputation credits in relation to tax due on contributions.
Pensions and annuities
Pensions and annuities that comply with requirements to enable members to access the pension RBL and gain an exemption
from the age pension assets test have strict conditions dealing with commutation and return of capital (see Chapter 14 for more
detail on income streams). Capital which would normally be lost in certain circumstances in a purchased income stream (for
example, a lifetime complying income stream) may be retained more effectively within the fund when it is an SMSF or SAF. For
example, in the case of a nonreversionary pension where the member dies outside the 10year guarantee period, any remaining
capital could form part of the reserves of the fund and may subsequently be reallocated to remaining members.
A further advantage of using a DIY fund to pay a defined benefit complying pension is that the assets backing the pension need
not be conservative. Public offer defined benefit complying income streams are generally invested in more secure investments
such as bonds, debentures and other fixed interest securities. In DIY funds the trustee retains full investment control and can take
advantage of a more flexible investment approach, provided that appropriate actuarial certification is obtained. Both actuarial
and audit certification is required to ensure that the fund is able to meet its pension liabilities, the level of guaranteed pension
payments are reasonable and the pension meets the necessary pension and annuity standards.
However, regulations gazetted on 12 May 2004 generally restrict the use of defined benefit pensions to funds that have at least
50 members (SIS Regulations Div 9.2B).
A defined benefit pension is any pension, other than (SIS Regulation reg 9.04E):
a pension wholly determined by a policy of life insurance purchased or obtained by the trustee, or
an allocated pension, or
a market linked pension (ie term allocated pension).
Therefore, defined benefit fixed term and lifetime pensions may not be commenced on or after 1 January 2006 by an SMSF
unless they are purchased by the SMSF from a life insurance company. If this option is used, the member would be the life
insured and the SMSF would be the annuity policy owner.
Where an SMSF purchases a lifetime income stream via a life insurance company, the trustees need to be aware of any death
benefit guarantee rules. If the member dies after the policy has been in force for more than the death benefit guarantee period, no
death benefit will be available (unless an automatic reversion to a dependant was established at the outset).
As a transitional measure, superannuation funds with less than 50 members are still able to commence a defined benefit pension
between 11 May 2004 and 31 December 2005 provided that certain conditions are met (SIS Regulations reg 9.04I). These
include that the pensioner:
was a member of the fund on 11 May 2004, and
retires from the workforce on or after age 55 before 1 January 2006, or
attains age 65 before 1 January 2006.
> [10710] DIY pension checklist
Further, the member must become entitled to be paid the defined benefit pension before 31 December 2005 and the first pension
payment must be made within 12 months after the day the member became entitled to be paid the pension.
The disadvantages in using DIY funds to pay pensions include the increased paperwork and complexity for the
members/trustees, eg dealing with tax compliance and maintaining bank accounts to facilitate pension payments (10710). This
is particularly the case as the members/trustees age. It may be more appropriate to use a wrap or public offer fund where all
these issues are handled in the one product so the member does not have to be concerned with these complex issues.
[10710] DIY pension checklist

A stumbling block that many DIY fund investors and their advisers encounter is how to "convert" an accumulation fund to a
pension fund. The following is a checklist of the key issues to be addressed by the trustees of a DIY fund so the fund can pay a
pension to a member.
Step (1) Review the funds trust deed and rules
Review the deed to ensure that the payment of benefits in pension form is permitted. Most DIY funds established in recent years
should contain deed provisions allowing flexibility of payment of all benefits.
However, older funds may not have been set up with the need to pay pension benefits in mind. Ideally, the funds deed and rules
should be broadly drafted to give trustees the flexibility to pay benefits in the form considered most suitable for particular
members. A fund with a deed specifying that all benefits must be paid in the form of a lump sum, that then pays a benefit as a
pension, will be in breach of the deed.
Even if the deed does contain provisions permitting pension benefits, check also that the provisions are broadly drafted so
pensions of any style can be supported, eg allocated pensions, fixed term pensions, lifetime pensions, etc.
Finally, ensure that there are no provisions that will conflict with the pension and annuity standards set out in SIS Regulations
reg 1.05 and 1.06. This is critical, as the favourable tax treatment of pensions under the tax legislation (ie deductible amount,
15% rebate, taxexempt investment earnings in the fund; see Chapter 14) is afforded only to those that satisfy the SIS pension
standards (ITAA 1936 s 27A(1) and 267(1)).
Step (2) Value the funds assets
Regardless of the type of pension that is to be paid, it is necessary to value the assets that will fund it so as to determine the
amount of pension payment. This valuation should be done at market value.
Currently, complying superannuation funds are generally taxed at a maximum rate of 15% on income. Income and capital gains
arising from a funds liability to pay a pension, however, can be exempted.
There are two methods that may be used to account for the assets backing a pension within a superannuation fund:
(1) the assets which relate to the payment of the current pension liabilities may be segregated (ITAA 1936 s 273A) in
this case all income derived from the segregated assets is exempted (ITAA 1936 s 282B), or
(2) an amount based on the funds current pension liabilities as a proportion of the funds total superannuation liabilities
(excluding segregated assets) (ITAA 1936 s 283).
IMPORTANT POINT
These provisions have the effect that gains from assets realised during the pension phase will be exempt from tax, whereas gains
realised in the accumulation phase are taxed at 15% or, if the assets have been held for at least 12 months, 10%. This can provide
a tax advantage where a member retires and moves into an income stream payable from the same superannuation fund. In this
instance, assets do not have to be realised in order to begin the pension they will simply be segregated or allocated for tax
purposes to form part of the funds current pension liabilities. It needs to be remembered that the main purpose for allocating the
assets to the pension phase must be to support future pension payments. Any taxation advantages are incidental.
Step (3) Review the funds investment objectives and investment strategy
The investment objectives and investment strategy appropriate for members accumulating benefits in a DIY fund may not be
appropriate once those members start to receive a retirement income stream from the fund. Therefore, a review, particularly of
the funds investment strategy, should be undertaken with regard to the pension members. The general considerations in setting
an investment strategy risk/return, diversification, liquidity and ability to meet liabilities still apply in this process.
Particular attention must be paid to the funds cashflow and liquidity: the trustees must ensure sufficient liquid funds are
available on a regular basis to actually pay the pension, without having to continually realise assets.
> [10710] DIY pension checklist
Step (4) Obtain the necessary actuarial certification

Depending on the type of pension paid, actuarial certificates may be required for solvency and taxation purposes.
A DIY fund that pays a defined benefit pension is required under the SIS Regulations (reg 9.29, 9.30 and 9.31) to produce an
annual actuarial certification stating that there is a reasonable probability the pension will continue to be paid for the agreed term
under the governing rules of the fund (see 14050).
A DIY fund that provides a pension may also be required under the Income Tax Assessment Act 1936, to obtain an actuarys
certificate for income tax purposes to qualify for tax exemptions on the funds income from assets used to discharge current
pension liabilities as they fall due (ITAA 1936 s 273A) (see 5300).
From 1 July 2004 and later income years, actuarial certification for taxation purposes is no longer required for allocated pensions
and term allocated pensions. For all other pensions (ie defined benefit pensions), actuarial certificates are still required to ensure
that the income derived by the fund from assets supporting pension liabilities is tax exempt.
Step (5) Register as a PAYG withholder
Pension payments made to a member of a superannuation fund are included in the types of payments from which PAYG tax
must be withheld (Taxation Administration Act 1953, Sch 1 s 1280). Any entity that must withhold PAYG tax is required to
register as a PAYG withholder, and then withhold that tax at the prescribed rates and remit the amount withheld to the ATO
(Taxation Administration Act 1953, Sch 1 Div 16).
Step (6) Obtain member request for pension to commence
To pay a pension to a DIY fund member, their benefits must be classified as unrestricted nonpreserved or they have met a
condition of release in respect of their benefits. Accordingly, the member must provide appropriate evidence to the trustee of the
fund that a condition of release has been met and that the member is entitled to have a benefit paid to them under the SIS Act
and the rules of the fund.
The trustees can then review the request, determine that benefits are payable under both the SIS Act and the funds deed, and
decide to commence a pension for the member.
The members request should also detail the type and features of the pension to be paid. Obviously, this should have regard to
the type of pension the fund wishes to offer. For example, in the case of an allocated pension, the member must give instructions
on the amount of payment (minimum or maximum or between the two, indexed or not) and its frequency, bank account details
for payment of the pension, etc. If the trust deed permits, the pension payment may be made in specie. Should this be required,
the members request for payment should reflect the assets to be paid in specie.
Step (7) Prepare and submit necessary taxation reports
The trustee is responsible for ensuring correct tax reporting once the pension starts to be paid. This will include RBL reporting
and details in relation to the members TFN declaration form, which can be obtained from the ATO. On an ongoing basis, the
trustee must report to the ATO as required under the PAYG rules.
The trustee must also appoint an approved auditor to give the trustee a report of the operations of the fund for that year. The
trustee must give to the auditor any document relevant to the report requested (SIS Act s 113) so the auditor can form an opinion
as to whether the fund meets solvency requirements or if there is any likelihood of any contravention of the SIS Act (s 129 and
130).
After the commencement of the pension, depending on the type of pension set up, the actuary will need to review the fund
annually and assess whether the assets of the fund are sufficient to meet the pension obligations and provide the necessary
certification (see step (4) above).
Step (8) Calculate and pay pension payments to the member
The amount of pension payment to be made to the member must be determined, having regard to the type of pension. In step (4)
an actuarial certificate will have been obtained, where necessary, effectively setting the rate of pension payment for a fixed term
or lifetime pension. In addition, if the fund is paying an allocated pension, the trustee must also ensure that the amount of the
payment is within the minimum and maximum payment limits permitted under the SIS Regulations (SIS Regulations Sch 1A).
Once the gross amount of pension is determined, the trustee is required to determine the amount of PAYG tax to be withheld and
to make the aftertax payment to the member. In determining the PAYG tax, the deductible amount and taxable amount of the
pension must first be calculated, along with any rebates (including the 15% pension tax rebate) to which the member is entitled,
as detailed in their TFN declaration form.
BT Super Book> CHAPTER 10 DIY SUPER > PENALTIES
> [10830] Fault liability
PENALTIES
[10800] A penalty unit
Penalties may be imposed by a court of law if the relevant provisions are breached. A penalty may be a fine or a term of
imprisonment. Fines are specified as a number of penalty units. A penalty unit currently equates to $110 for an individual and
not greater than five times the individual penalty unit for a corporation.
The trustee against whom a civil penalty order is made, or who is convicted of an offence in the relation to the strict or fault
liability provisions, will generally be disqualified from acting as a trustee of a superannuation entity (SIS Act s 121).
[10810] Civil penalty

The civil penalty provisions include (SIS Act s 193):
observing the sole purpose test
observing the prohibition on lending money to members and related parties
observing the prohibition on borrowing money
taking all reasonable steps to ensure the inhouse asset rules are complied with
notifying the regulator (ATO for SMSF) of a "significant adverse event", and
complying with the covenants to invest fund assets on an arms length basis.
The regulator, or their delegate, may apply to the Federal Court for a civil penalty order to be made. The court has discretion to
relieve a person from liability if it believes the person acted honestly and should reasonably be excused (SIS Act s 221).
Contravention of these provisions can have both civil and criminal repercussions (SIS Act s 197 and 202).
Such a breach has to be proved on the balance of probabilities, which requires the regulator to show that it is more likely than
not that the breach occurred.
This penalty order carries with it a maximum fine of 2,000 penalty units ($220,000) for an individual and 10,000 penalty units
($1,100,000) for a corporation (SIS Act s 196).
A criminal breach of the civil penalty provisions
A criminal breach has to be proved beyond reasonable doubt, and only applies where the trustee contravenes the civil penalty
provision by acting dishonestly with the intention, whether directly or indirectly, to gain an advantage for any person, or
intending to deceive or defraud someone. This offence carries with it a term of imprisonment of up to five years (SIS Act s 202).
However, criminal proceedings cannot be brought against a person for a breach of the civil penalty provisions if a civil penalty
order has already been sought for that breach (SIS Act s 203).
[10820] Strict liability

The strict liability provisions include, but are not limited to, complying with:
the requirement to keep trustee minutes and retain them for at least 10 years (SIS Act s 103), and
the keeping of correct accounts or records (SIS Act s 303).
Strict liability may arise regardless of fault. A trustee is guilty of a strict liability offence if it can be proved beyond a reasonable
doubt that the relevant offence occurred. The trustee may raise the defence of reasonable excuse, such as the taking of all
reasonable steps to prevent the offence from occurring.
[10830] Fault liability

The fault liability provisions include:
complying with prescribed "operating standards", being prescribed standards for the operation and administration of a
fund (SIS Act s 34)
keeping certain records (SIS Act s 306, 307 and 308), and
BT Super Book> CHAPTER 10 DIY SUPER > PENALTIES
> [10840] Civil liability
a disqualified person acting as trustee (SIS Act s 121). Note that failing to inform the regulator that a trustee has become
disqualified is an offence of strict liability (SIS Act s 121(3)).
It has to be proved beyond reasonable doubt that the trustee committed the breach knowingly, intentionally or recklessly. The
maximum monetary penalty for an individual ranges from 102,000 penalty units ($1,100$220,000) or five times that for a
corporate trustee, or a term of imprisonment of up to five years.
[10840] Civil liability

If a trustee breaches a civil liability provision, the members or beneficiaries have a statutory right to take action against the
trustee for any loss or damage suffered as a consequence of a breach of a covenant contained, or taken to be contained, in the
governing rules of a fund.
Also, a court may grant an injunction to restrain a person from engaging in an action which contravenes the provisions, or may
require a person who refuses to do an act or thing to do that act or thing.
BT Super Book> CHAPTER 10 DIY SUPER > WINDING UP A DIY FUND
> [10920] Windingup action plan
WINDING UP A DIY FUND

[10900] Why wind up a DIY fund?
There are various reasons why a superannuation fund may be wound up. The funds deed may contain provisions for windup
upon the occurrence of certain events. For example, a majority of members may request that it be done, or the trustees may
determine that it is in the interests of the members to do so (eg if it becomes prohibitively expensive to maintain the fund and
this will adversely impact members benefit entitlements). If the fund has an employersponsor, then windup of the employer
or a decision by it to change its superannuation arrangements may also lead to a windup of the fund.
If the fund becomes technically insolvent and no rectification action is undertaken, the trustee/s has/have become disqualified.
The trustees may also be required under the SIS Act to wind up the fund (SIS Regulations reg 9.17, 9.23, 9.38 and 9.43). A fund
can become technically insolvent when the net realisable value of its assets is less than the minimum guaranteed benefits
(generally benefits funded by member contributions and compulsory employer contributions).
In the case of SMSFs with individual trustees, the fund may be required to be wound up because the trustee/s has/have died.
While windingup may occur in quite different situations, the general process is the same.
[10910] Windup process

Winding up a superannuation fund essentially involves determining the value of the funds assets and its liabilities, and using the
assets to pay out those liabilities in an orderly and equitable fashion. The liabilities to be considered include:
members benefit entitlements (the windup of a fund does not mean that members forfeit their benefit entitlement;
ensuring that members receive their accrued benefits is a crucial part of the windup process)
taxes or duties owing by the fund
insurance premiums due and payable by the trustee, and
expenses payable to other parties in relation to the funds activities and the windingup process itself (eg auditors,
lawyers, investment advisers).
Windingup may be a lengthy process. The trustee needs to identify and value all assets and liabilities and take steps to liquidate
or transfer ownership of the various assets in satisfaction of those liabilities. Depending upon the nature of the assets of the fund,
this may take some time. For example, consider a fund with four members where a bank term deposit and an investment
property are the only assets. The windingup process of the fund may take as long as it takes for the sale of the property, if
liquid funds are required to pay out the appropriate benefit entitlement to each of the four members.
The SIS Regulations do not prescribe the steps a trustee should take in the windup of a fund, and it would be unlikely for the
funds deed to contain detailed steps. However, the SIS Regulations do require the trustee to give certain priorities to the various
liabilities of the fund. The first priority is for the administration and other costs associated with the windingup proceedings (SIS
Regulations reg 9.25(2), 9.45(2)). If the fund is solvent, the next priority is members benefits the amount allocated to
members must be at least their minimum guaranteed benefits (SIS Regulations reg 9.25(4), 9.45(4)). If the fund is technically
insolvent, members still receive the next priority, but their benefit entitlement will be a proportion of the remaining assets of the
fund (SIS Regulations reg 9.25(5), 9.45(5)).
There are also provisions in the SIS Regulations relating to the communication to members and the regulator of the decision to
wind up a fund. The regulator is required to be informed of a trustees decision to wind up a fund (SIS Regulations reg
11.07(3)). SMSFs must notify the ATO before, or as soon as practicable after, the windingup is commenced (SIS Regulations
reg 11.07(4)(a)). All other funds, including SAFs, must notify APRA as soon as practicable after the making of the decision to
wind up is made and, in any event, before it is commenced (SIS Regulations reg 11.07(4)(b)).
The decision to wind up a fund is also a significant event, and therefore must be communicated to members. The trustee must
inform members as soon as practicable after it is reasonable for the trustee to expect that windingup will commence.
[10920] Windingup action plan

(1) Convene a trustee meeting to ratify the decision to wind up the fund. Record the decision in the trustee minutes, along
with the timetable for the windup.
(2) Notify the regulator of the trustees decision to wind up the fund. SAFs must do so as soon as practicable after the
BT Super Book> CHAPTER 10 DIY SUPER > WINDING UP A DIY FUND
> [10930] Other considerations
decision is made, and it would be prudent for SMSFs to do the same.

(3) Inform members of the windup decision, the reasons for it and what it will mean for them.
(4) Make provision for the outstanding expenses of the fund, including tax, insurance premiums, administration charges and
professional advisers fees.
(5) Calculate all members entitlements up to the date of the windup.
(6) Arrange for the transfer of members benefits to a successor fund, generally another DIY fund.
(7) Arrange for payment of all outstanding expenses and taxes.
(8) Complete the final set of fund accounts (with audit), the funds windup return as required by the regulator and the final
tax return for the fund.
[10930] Other considerations

The trustee should also consider the following issues:
CGT implications of disposing or transferring fund assets (see CGT superannuation fund at 5060), and
RBL implications on member pensions on rollover (see Rollover of pension and annuities at 9260) and the
recalculation of the deductible amount on partial commutation (see Recalculation of deductible amount on partial
commutation at 14740), and full commutation and rollover.

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BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?

> [10010] Self managed superannuation funds

WHAT IS A DIY FUND?

[10010] Self managed superannuation funds

Copyright 2006, CCH Australia Ltd

BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?

> [10030] Differences: SMSF, SAF and Public Offer Funds

[10020] Small APRA superannuation funds (SAFs)

[10030] Differences: SMSF, SAF and Public Offer Funds

Copyright 2006, CCH Australia Ltd

BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?

> [10030] Differences: SMSF, SAF and Public Offer Funds

Public offer and other

Fewer than 5 members within

Fewer than 5 members, with not limited by legislation

May not be public offer

All members are Trustees;

APRA approved trustee or

APRA approved trustee

Exemption from requirements that:

trustee not be subject to

trustee not allow others to

Management of the fund

Must have arrangement to

Must have arrangement

No protection under culpability test.

Members protected under

Members protected under

Copyright 2006, CCH Australia Ltd

BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?

> [10040] Similarities SMSF, SAF and Public Offer Funds

Yes within the terms of

Small account and lost

100% business real property;

100% business real

Certain investments in related

No benefit protection or reporting

Trustee must apply benefit

Account records and

Yes within the terms

No requirement to provide a copy of No exemptions.

Trustee must report on

[10040] Similarities SMSF, SAF and Public Offer Funds

Copyright 2006, CCH Australia Ltd

BT Super Book> CHAPTER 10 DIY SUPER > WHAT IS A DIY FUND?

> [10040] Similarities SMSF, SAF and Public Offer Funds

Copyright 2006, CCH Australia Ltd

> [10170] Residency

COMPLYING AND NONCOMPLYING FUNDS

[10160] Implications of noncomplying status

Copyright 2006, CCH Australia Ltd

> [10190] Active member test

[10180] Central management and control

[10190] Active member test

Copyright 2006, CCH Australia Ltd

to be a nonresident active member.

Copyright 2006, CCH Australia Ltd

> [10190] Active member test

BT Super Book> CHAPTER 10 DIY SUPER > ESTABLISHING A DIY FUND

> [10200] Steps in establishing a DIY fund

ESTABLISHING A DIY FUND

Copyright 2006, CCH Australia Ltd

BT Super Book> CHAPTER 10 DIY SUPER > ESTABLISHING A DIY FUND

> [10200] Steps in establishing a DIY fund