If you currently have a Self Managed Super Fund (SMSF) or are considering one, here are some important points you need to consider about this increasingly popular super option.

SMSFs (often referred to as ??DIY super??) are popular, with in excess of $100 million currently invested in over 290,000 of these funds. They attract significant tax concessions and are considered by many to offer flexibility and control over your retirement investment strategy.

You should be aware that the ATO has full regulatory control over these funds, ensuring compliance not only with the tax laws but also with all the other legal regulatory requirements.

Superannuation at the best of times is a complex and confusing beast. Recently, the ATO has expressed its concerns about significant potential non-compliance with these tax laws and other regulatory requirements. In particular, some SMSF fund owners are treating the regulatory requirements as guidelines only ?? but they are not optional!

So, it??s timely to have a look at some of the things the ATO is watching out for in managing an SMSF correctly.

It may be worth keeping in mind that we are not looking at whether an SMSF is a suitable retirement investment vehicle for you.  That??s something you may need to consider in conjunction with an appropriately qualified and licensed professional. Rather, we are focusing more on raising your awareness of the management issues that go hand-in-hand with an SMSF, whether you are thinking about going down the ??DIY super?? route or already have an SMSF.

What to watch out for?

Here are the ATO??s main concerns:

Investment strategy

·         SMSF??s trustees must have a proper investment strategy and implement it. The ATO will be looking to see this strategy in writing. You should also be aware that there are a number of stringent rules that determine what sort of assets the fund can invest in, as well as rules that restrict the types of dealings a fund can have with its members and associates of members.

Sole purpose test (SPT)

·          An SMSF must be run with the single and only purpose of providing retirement benefits for its members.

Arm's length dealings

·         All an SMSF??s dealings must be conducted at arm's length (e.g., appropriate written agreements are in place at prevailing commercial or market rates).

Keeping assets separate

·         Fund assets need to be maintained separately from assets of your business. Make sure the assets are in the name of the fund, not just in the name of a trustee in the trustee??s own right.

Bank accounts

·         Ensure the fund??s bank accounts are in order and are separate from the personal accounts of the trustees. Be careful ?? an SMSF bank account should not go into overdraft.

Loans

·          This is a particular problem area. An SMSF is not permitted to have loans in place with a member of the fund or a relative of the member (e.g., you carry on business in partnership and you and your partners are also members of an SMSF ?? that SMSF cannot make a loan to the partnership for any reason). Also, the fund's assets should not be used as collateral for a loan.

 Record keeping

·         An SMSF must produce and maintain quite a range of records (e.g., annual operating statement, annual statement of financial position, minutes of meetings, appropriate tax records, and tax returns).

 Annual tax returns

·         Don??t overlook lodging an SMSF??s annual tax return.

·         There is also a supervisory levy that is due to be paid on lodgement of the annual return.  This is in addition to any tax the fund may have to pay.

·         You will also need to arrange an annual audit of the SMSF??s financial accounts and ensure compliance with the regulatory requirements.

Here??s a checklist of some current ??hot spots?? to be mindful of when you are doing your 2004 end of year tax preparations.

1. Keep proper records

·         This is where a lot of problems can start ?? so it??s best to approach record keeping as if your business could be audited at any time.

·         To start with, generally you should keep your records for five years.

·         A check list of the records you will need include bank statements, cheque butts, deposit slips, cashbooks, and accounting records (e.g. your general ledger, trial balance, and preliminary profit and loss statement and balance sheet).

·         Watch out for some types of expenses that need particular records (e.g. motor vehicle log books, diaries for travel expenses).

·          You may want to consider if your business should take advantage of the Simplified Tax System (STS) for small business ?? STS doesn??t suit every small business but it could simplify record keeping and reduce compliance hurdles.

2. Avoid common GST problems

·         GST compliance is a high priority on the ATO??s audit hit list ?? a lot of inadvertent mistakes occur simply because a business may not have proper GST records (including correct GST invoices).

·         Be careful not to understate the total value of goods and services supplied.

·         Make sure you are not overstating your entitlement to input tax credits.

·         Keep a watchful eye on the timing of supplies or purchases  - make sure you report them in the correct period.

·         Classify your supplies correctly ?? be particularly careful if you think a supply is GST free.

3. Value trading stock correctly

·         Resist the temptation of taking a guess at your stock levels or their value.

·         You will need to value properly your closing stock on hand and work-in-progress at June 30.

·         It??s also important to specify which valuation method you use ?? cost, replacement, market value (or less if the stock is obsolete).

4. Maximise deductions if possible

·         It??s that time of year when you may be considering increasing your business deductions by prepaying some items of expenditure.

·         Before you prepay any business expenses, you will need to check out the current prepayment rules to make sure your business is able to maximise its deductions.

·         These rules can be complex ?? you may have to apportion the deduction over more than one tax year.

5. Review all loans before year end

·         Watch out for any private company loans to shareholders or anyone linked with or related to a shareholder.

·         If a loan like this is not fully repaid in the same tax year in which it arises, or is not repaid on commercial terms where the loan is for more than a tax year, there may be some unexpected tax bills ?? the loan could be treated as an unfranked dividend from the private company, which is then fully taxable in the recipient??s hands.

6. Utilise losses

·         Are you carrying on a business alone or in partnership?

·         Has your business received income from more than one activity?

·         Has one (or more) of these activities made a loss?

·         You may be able to offset this loss against profits from your other business activities during this year ?? but there are some commerciality tests (known as the ??non-commercial loss?? provisions) that your business will need to satisfy so you can do this.

7. Did you sell any business assets?

·         Working out the tax implications of selling business assets these days is complicated ?? there can be a number of potential tax consequences.

·         There may be an assessable or deductible amount arising on the sale depending on whether or not you sell the asset for more or less than its final adjustable value.

·         There may also be a capital gain or loss (if the asset was used partly for non-taxable purposes), and a potential GST liability.

8. Claim bad debts correctly

·         If your business has a debt which has already been brought to account as assessable income, you may be entitled to a deduction if the debt is ??bad?? and is written off before 30 June.

·         A debt is likely to be ??bad?? if you have made an effort to collect it, it looks like there is little likelihood that you will ever be successful in collecting it and you have abandoned any debt recovery action.

·         Make sure you write off any bad debts in your accounts before 30 June.

9. Done any contracting this year?