Click on the video above to view Audit Director, Clive Massingham talk through common SMSF breaches and how to look out for them. A transcript of the video is below:
Below are some of the most common breaches with Self Managed Super Funds (SMSF) and how to ensure you look out for them.
Loans to members
- Members (and their relatives) are prohibited from borrowing funds from their SMSF, including short term loans. Doing so will result in a breach of the Superannuation rules and hefty penalties can apply.
- This is the most common breach reported by auditors to the ATO each year.
- Some loans can be made to certain related parties (such as a related private company) where a proper agreement is in place and the dealings are done on arm’s length terms. This is also subject to in-house asset rules and must not exceed more than 5% of the total assets of the fund. However, the ATO recommends being cautious when lending from your SMSF.
- It is understandable why this breach is so common, particularly in this day in age where you can transfer money on your phone with banking apps that make it so easy. Many of these breaches are mistakes. Despite this, the auditor will most likely pick this up and report a breach, to make matters worse, you will need to return this money with interest.
Use of SMSF assets by members or associates
- Assets acquired by an SMSF are not to be used by members or their associates. Two common errors made by trustees are:
Members and their associates are not permitted to live in the residential property held by the super fund, even if the rental income is at market value. Associates include (but are not limited to) spouses, parents, children, siblings, business partners and their spouse/children, and any companies or trusts controlled by any of those respective parties.
A related party is, however, able to occupy commercial premises, provided all dealings are at arm’s length.
I often take my young kids on a bike ride through Hamilton on the Northshore on Brisbane. It is beautifully located along the Brisbane river and in my opinion looks like a very nice place to live. Out of interest I checked the availability and price of these properties. To my surprise they were in excess of $1.5mil and many were owned by SMSF.
Collectables (artworks, coins, jewellery)
Collectables must not be used for the personal enjoyment of fund members or their associates. They must be held separate, either at a storage facility (not within the member’s residence) or hired out to a third party generating market value income (i.e. income producing).
Incorrect market value for assets
It is essential that assets are valued at market value. This is especially significant when a member is in pension phase, as the market value of the assets directly affects the minimum pension requirements for the following year.
Shares on the stock exchange and cash are easily valued, however other assets such as property and shares in unlisted companies may require assistance from a real estate agent or obtaining financial information such as financial statements.
There has been a marked rise in breaches in this area due to renewed focus from the ATO.
Assets not in line with the investment strategy
All investment decisions made by the fund must be in accordance with the investment strategy. As such, the investment strategy must be reviewed regularly to ensure investments are in line with the strategy. Where a new class of asset is purchased within the fund, such as international shares or a commercial property, and the strategy does not already allow for this, an update is required.
Assets set up in the wrong name
All assets of the fund are required to be in the name of the fund. Regularly bank accounts and other assets, such as shares, are set up with the incorrect holding name, such as in the name of the individual members.
Where an asset is not held in the name of the fund, the trustees should rectify the documentation as soon as possible.
Other documentation that often has the incorrect name includes life insurance policies and invoices for property expenses.
Hall Chadwick QLD is not a financial advisor. This article should not be taken as financial or investment advice and is general in nature. You should consider seeking independent financial and legal advice to see how the information provided relates to your unique circumstances.