The ATO’s recent report has highlighted a few common breaches. This article will explore these breached in more detail to assist SMSF’s and
Acquiring Assets from Family and Associates
Let us first establish who a related party of an SMSF is?
They can be:
- Parents, brothers, sisters, Aunts and uncles, a nephew or niece, a close descendant, a partner of the above mentioned and an adopted child
- Members of the smsf
- A trust or company controlled by a member (referred to as Part 8 Associates)
SMSF’are not allowed to purchase assets from family members or associates (related parties), however, there are exceptions for the following types of assets:
- Business Property ( a commercial space, land used in operating a business)
- Listed securities IE: shares, ETF’s, LIC’s, Bonds, ETO’s which are listed on approved stock exchanges
- Public Unit trusts IE: REITs,
Your SMSF is allowed to hold up to 5% of in-house assets but if the asset appreciates, your fund will be in breach of the rules.
When acquiring assets from related parties you need to make sure that it is done on a
- Commercial basis – neither below market value or above for rent and purchase price
- The asset must be purchased at market value
Investing / loans to members and using SMSF funds for personal use
Your SMSF funds must be used in observance of the sole purpose test ( SISA 62) to
1: To provide retirement benefits to members
2: To provide death benefits to next of kin
x Provide a loan or financial assistance to a related party of a SMSF
x You cannot use money held in a SMSF bank account for personal bill payments or any other purpose.
Pension or payment of benefits
In order for pension payments to be paid or for a lump sum transfer of money, the following conditions must be met
- A member meets preservation age – Transition to retirement pension
- A member meets preservation age and retires – Ages 60 and retires and forms a pension
- A death benefit is required to be paid – member passes away and insurance is paid to spouse
- A payment is requested by a member on the grounds of
- Financial Hardship
- Total incapacity
- Temporary incapacity
New SMSF Obligations introduced from 1 July 2013
These new measures require SMSF trustees to adhere to the following:
- The SMSF’s investment strategy must be reviewed at least annually
- The SMSF’s investment strategy must consider insurance for members
- SMSF’s must value assets at market value to meet financial reporting requirements
SMSF trustee duties?
If you fail to act in accordance with the super and tax laws as an SMSF trustee, then you risk:
- Your SMSF becoming non-complying and losing its tax concessions
- Disqualification, removal or suspension as a trustee of the SMSF
- Civil or criminal prosecution
- Financial penalties.
Always consult your SMSF trust deed first, then seek advice on how you can manage a contravention.
|Contravention||Fine Fee||SIS Act|
|Not notifying ATO of SMSF wind up|| |
|Lending money to relatives or members|| |
|Non-compliance with in-house asset restrictions|| |
|Not completing annual SMSF return|| |
|Not completing ATO formal survey|| |
Here are some of our auditor’s thoughts on the subject of SMSF contraventions and his approach to Prevention and reporting management.
“As an auditor, it has been an increasing trend for Trustees to breach the sole-purpose test, and providing members and relatives with financial assistance. These are still the two biggest areas for concern for auditors, and generally arises on 5% – 10% of occasions. I guess, the remedy is more Trustee education surrounding the rules, and more engagement from auditors to the Trustees to ensure the rules are being made aware of. The Australian Taxation Office does not like imposing financial penalties on SMSFs, rather the ATO has several remedies which are available to them, depending on the nature of the breach. The remedies include;
(1) Issue a rectification direction – This requires the Trustees to take specific action to rectify the contravention within a specific timeframe. If they do not comply with the rectification, they are liable to pay a fine.
(2) Issue an education direction – This will require the Trustees to complete an ATO-approved education course within a specific timeframe. If they do not comply with the education direction, they are liable to pay a fine. Also, the cost of the course is payable personally by the Trustees, and cannot be refunded by the SMSF.
(3) Impose an administrative penalty – The ATO will be able to impose an administrative penalty ranging from $900 – $10,800. This will only apply to specific breaches but EACH trustee or each director will be jointly and severally liable. Any penalties applied must be paid for by the trustee/ director personally and cannot be refunded by the SMSF.
It is important that all Trustees/ Directors are reminded of the ATOs position should any breaches occur, and any failure to follow the ATOs directives may result in severe financial penalties applied to either the Fund or the members personally. So, always strive to be complying.”
Dinesh Nanayakkara My SMSF Property Auditor, SSAud, DFP, Bbus(Accounting)
One Final TIP:
Updating a funds deed can insure that old clauses with the following restrictions can be avoided
- Cannot commence a transition to retirement income stream whilst employed
- Must cash superannuation once a member is 65
- Not allow borrowing in a SMSF
It is paramount that trustees recognise their responsibilities and if able, appoint appropriate people to assist with the management of their SMSF’s. The ultimate responsibility for all decisions of the fund are the members.
Warning: Seek Advice, this is general advice only