SMSF Compliance — What the ATO Expects

The Sole Purpose Test

The most fundamental rule: your SMSF must be maintained for the sole purpose of providing retirement benefits to members (or their dependants in the event of death). Every investment decision, every transaction, and every action must serve this purpose. Using fund assets for personal benefit — even temporarily — is a serious breach.

Investment Rules

• Investment strategy: You must have a written investment strategy that considers diversification, liquidity, risk, and members' circumstances. Review it at least annually.
• Arm's length transactions: All investments must be made on commercial terms. You can't buy assets from or sell assets to related parties at non-market rates.
• In-house assets: Investments in related parties (loans to members, investments in related trusts/companies) must not exceed 5% of the fund's total assets.
• Collectibles and personal use assets: Artwork, jewellery, wine, and other collectibles can be held but must be stored securely, insured, and never used personally by members or related parties.
• Borrowing restrictions: SMSFs can only borrow under a limited recourse borrowing arrangement (LRBA) for acquiring a single acquirable asset.

Annual Obligations

• Annual return: Lodge the SMSF annual return with the ATO, reporting income, deductions, member contributions, and fund details
• Independent audit: Every SMSF must be audited annually by an approved SMSF auditor. The auditor checks both financial statements and compliance.
• Member statements: Provide annual statements to members showing contributions, earnings, and balances
• ATO reporting: Report transfer balance account events, including pensions commenced or commuted

Common Compliance Pitfalls

• Lending money to members or relatives
• Using fund assets for personal purposes (e.g., living in a fund-owned property)
• Not separating fund assets from personal assets
• Failing to update the investment strategy
• Late lodgement of annual returns
• Not keeping adequate records of trustee decisions
• Exceeding contribution caps without realising

Penalties for Non-Compliance

The ATO has a range of enforcement tools including education directions, rectification directions, administrative penalties (up to $18,780 per trustee per contravention), disqualification of trustees, and in serious cases, making the fund non-complying — which means the entire fund balance is taxed at 45%.