Running your own self-managed super fund can be time-consuming, but it’s about to get a little easier thanks to a change announced in the May 2018 Budget. From 1 July 2019 SMSFs will be able to move to three-yearly audits if they have three consecutive clear audit reports and lodged their annual returns on time.
That’s good news for the vast majority of Australia’s 600,000 SMSFs. The latest Australian Taxation Office (ATO) review of the sector found only 2 per cent of funds breach the rules each year.
The ATO acts against 300 or so individual trustees each financial year, with 333 trustees disqualified in 2016-17.Thankfully, most compliance breaches are easy to rectify with up-to-date information and professional support.
Here are some of the most common mistakes to watch out for:
Dipping into fund money or assets
At the heart of SMSF compliance is what is called the ‘sole purpose test’. Simply stated, this means that all activities of your SMSF must be for the sole purpose of providing retirement income to fund members or death benefits to their dependents.
A common misunderstanding among small business owners is to treat their SMSF like a personal fund they can dip into when their business is going through a tough patch. Some SMSF trustees may also be tempted to help family members with a loan or gift of fund money.
The rules are clear: the early release of money or assets to fund members or their relatives is illegal.
Limits on ‘in-house assets’
An in-house asset is where a fund owns an interest in an investment owned by one or more of the SMSF members, their relatives or related entities. Examples include shares in a private company controlled by a member, a house owned by the fund that is leased to a member’s son, or a loan to a partnership where members are the partners.
The ATO is also keeping a close eye on what it calls ‘artificial arrangements’ involving SMSFs and related-party property development ventures.
There are strict limits on in-house assets. The rules stipulate that a maximum of 5 per cent of an SMSF’s assets can be allocated to in-house assets. This needs ongoing monitoring to avoid unintentional breaches. For example, if a member retires and takes a lump sum from the fund, an in-house asset could end up worth more than 5 per cent of the fund’s remaining assets.
Separation of assets
Fund assets must be kept separate from your personal and business assets. Unfortunately, if your fund invests in collectables such as art or wine, hanging the fund’s Brett Whiteley in your home or drinking a bottle of its Grange would breach the sole purpose test.
You would also breach the rules if you bought an investment such as shares with fund money but registered them in your own name, even if this was accidental. Say you lost your job and couldn’t pay the mortgage; your mortgage lender could force you to sell your shares to repay the debt, putting you in breach of super’s sole purpose test.
Records and reporting
To stay on the right side of the rules you need to have a separate bank account for fund money. You should also document all investment decisions, transactions and ownership. It’s important for trustees to stay up-to-date with reporting requirements.
Record-keeping is more important than ever now that SMSFs must report events that effect the $1.6 million transfer balance cap to the ATO. For most funds this will be an annual duty, but some funds with members in retirement phase may be required to report events affecting transfer balance caps quarterly.
Until the Budget proposal to allow three-yearly audits for well-run funds becomes law, all funds must be audited by a professional SMSF auditor each financial year. Your auditor is required to advise you, and the ATO, of any breaches of the rules. It’s up to trustees to rectify any transgressions as soon as possible to avoid potentially costly penalties.
The cost of transgression
The ATO generally gives SMSF trustees a chance to rectify mistakes, but penalties of up to $12,600 can be levied for serious breaches such as loans to members.
SMSFs offer opportunities that are not possible with mainstream super funds. They allow you to be more hands on and utilise strategies such as investment in property or the purchase of business assets. But you need to comply with the rules.
If you would like information or support with the running of your SMSF, give us a call.
Most common slip-ups
| Errors |
As a percentage of errors |
As percentage of the value of errors |
| Loan to member/financial assistance |
21.4% |
14.9% |
| In-house assets |
19.1% |
28.2% |
| Separation of assets |
12.8% |
24.5% |
| Administration |
10.3% |
2.2% |
| Borrowings |
8.0% |
8.6% |
| Sole purpose |
8.3% |
4.4% |
| Investment at arm’s length |
7.6% |
7.8% |
| Operating standard |
7.5% |
6.2% |
| Acquisition of assets from related parties |
1.2% |
2.3% |
| Other |
3.7% |
1.0% |