Avoid These 9 Common Mistakes When Running A SMSF

Did you know that over 1.1 million Australians are managing their own superannuation funds? While self-managed super funds (SMSFs) offer greater control over retirement savings, they come with significant responsibilities. Many trustees unknowingly risk substantial penalties due to common mistakes in fund management.

Running a SMSF is complex, requiring careful attention to the many regulatory requirements and investment decisions. The consequences of mismanagement can be severe, potentially resulting in financial penalties, legal complications, and reduced retirement savings. Understanding these pitfalls is crucial for any SMSF trustee.

In this article, we’ll examine nine of the most common mistakes that SMSF trustees make to help you identify and avoid them.

The Stakes Are High: Understanding the Risks
Before diving into specific mistakes, it’s important to understand what’s at stake. The Australian Taxation Office (ATO) takes SMSF compliance seriously, with penalties ranging from administrative fines to civil and criminal penalties. A single breach can result in penalties, while severe violations may lead to fund assets being frozen or the SMSF being deemed non-compliant.

Now let’s look at the nine most common mistakes trustees make when managing their SMSF:

1. Lending Money to Family Members or Related Parties

One of the most common compliance breaches occurs when trustees lend money to family members or related parties. The ATO strictly enforces this restriction because it protects the fund’s assets and ensures they are used solely for retirement purposes and not for a current day benefit.

Under current regulations, lending to members or their relatives is prohibited while loans to related entities cannot exceed 5% of the fund’s total assets (known as the in-house asset rule). Even within this limit, any loans must be made on commercial terms, including market-rate interest and proper documentation. Breaching these rules can result in significant penalties for each trustee and potential disqualification from managing the fund.

2. Purchasing Residential Property from Related Parties

The rules around property purchases are particularly stringent. SMSFs are prohibited from acquiring residential property from related parties, even if the transaction is at market value. This restriction applies to immediate family members, their spouses, and any companies or trusts they control.

The only exception is commercial property, which must be used wholly and exclusively in one or more businesses. Mistaking this rule can lead to a forced sale of the property and substantial penalties.

3. Exceeding Annual Contribution Caps

Managing contributions requires careful attention to annual caps. For the 2024-25 financial year, the concessional (before-tax) contribution cap is $30,000, while the non-concessional (after-tax) cap is $120,000. Exceeding these limits can trigger excess contributions tax.

The complexity increases when considering carry-forward and bring-forward provisions and total superannuation balance restrictions. Mistakes here often compound over time, leading to unexpected tax bills and additional administration issues.

4. Failing to Diversify Investments

An investment strategy that addresses diversification isn’t just good practice—it’s a legal requirement. The ATO requires trustees to document their investment strategy and demonstrate how it manages risk through diversification. Over-concentration in a single asset class, whether property, shares, or cryptocurrencies, can breach this requirement.

The consequences extend beyond potential penalties. Poor diversification makes the fund vulnerable to market fluctuations and can create liquidity problems when paying benefits or meeting tax obligations.

5. Using SMSF Assets for Personal Benefit

The ‘sole purpose test’ is fundamental to SMSF compliance. Assets must be maintained strictly for providing retirement benefits. Using fund assets for personal benefit—even temporarily—can result in severe penalties.

Common breaches include:

• Displaying SMSF-owned artwork in a member’s home
• Using an SMSF-owned holiday house for personal stays
• Operating a business from an SMSF-owned commercial property without paying market rent

Penalties for breaching the sole purpose test can include fund disqualification and tax penalties of up to 45% of the fund’s value.

6. Inadequate Succession Planning
Many trustees overlook the importance of succession planning until it’s too late. Without proper arrangements, a trustee’s death or incapacity can halt fund operations, preventing access to assets and causing significant stress for beneficiaries.

Essential succession planning elements include:

• Appointing an enduring power of attorney
• Maintaining up-to-date binding death benefit nominations
• Documenting clear succession instructions for remaining trustees

7. Neglecting Asset Valuations

Regular, accurate valuations are crucial for SMSF compliance, particularly when calculating member balances and paying pensions. The ATO requires assets to be valued at market rates annually and at specific events like starting a pension.

Incorrect valuations can lead to:

• Pension payment errors
• Breach of transfer balance cap limits
• Incorrect member benefit calculations
• Failed audits and potential penalties

Keep in mind that real estate valuations must be based on objective and supportable data to ensure they are compliant.

8. Inadequate Insurance Coverage

While it is not mandatory to hold insurance in an SMSF, trustees must consider the insurance needs of members as part of their investment strategy. Failing to document this consideration—even if deciding against insurance—can constitute a breach of trustee duties and leaves family members financially vulnerable.

Adequate insurance coverage protects members and their families against:

• Death
• Total and permanent disability
• Loss of income

9. Poor Record-Keeping

Good record-keeping and proper documentation is your best defence against compliance breaches, however trustees often don’t prioritise this as it can be onerous and time consuming. The ATO requires SMSFs to maintain accurate records for at least five or ten years (depending on the type) including:

• Financial statements
• Tax returns
• Member contributions and benefits
• Investment decisions and strategy documents
• Minutes of trustee meetings
• Audit reports

Incomplete or poor record-keeping can result in audit and lodgement delays, penalties, and difficulty defending investment decisions or compliance measures.

Protecting Your Retirement Savings

Managing an SMSF requires vigilance, expertise, and attention to detail. The penalties for getting it wrong can significantly impact your retirement savings and financial well-being. At Bentleys, our SMSF specialists can help you navigate these complexities and ensure your fund remains compliant while working towards your retirement goals.

Don’t wait for a compliance breach to seek professional guidance. Contact Bentleys today to arrange a consultation with our SMSF experts and ensure your retirement savings are protected.

Read next

• SMSF: Have you considered what you will do if an unexpected event occurs?

Want to know more about how Bentleys can help you?

Make a time for a chat with us today. We’re here to help you get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.