There is no doubt that self-managed superannuation funds (SMSFs) are often complex and confusing. Many people who manage their own superannuation fund aren’t aware of their responsibilities or the complexities of the legislation.
While running your own SMSF has a number of attractive benefits, it also comes with a lot of important rules and regulations. It is essential to be aware that when you establish a SMSF, you become a trustee of that fund and take on all the obligations of being a trustee – many of which you may not be aware of. Often people running SMSFs neither seek nor take advice and end up inadvertently breaking the rules. Breaches made while managing SMSFs range from minor administrative errors through to significant breaches, with the potential for big penalties and even imprisonment.
While it is essential for members of an SMSF to keep records of meetings, failing to do so is a very common breach. It’s important to have proof that the Trustees of the fund meet regularly to make decisions. Important things to record in the minutes of each meeting include:
Exceeding Contribution Caps
Exceeding the permissible contribution limits within superannuation has now become a common breach, with breaches numbering in the tens of thousands every year.
Lending Money to Members or Related Parties
Another common breach made in the management of SMSFs is lending money or financial assistance to another member (or to a related party member) using the assets within the fund.
If a loan is made to a related party, the loan then becomes an in-house asset. The in-house asset rule states that the amount of the loan must account for no more that 5% of the value of the total superannuation fund (along with any other in-house assets). In addition to the 5% rule, a commercial rate of interest must also be charged.
Breaching either of these rules could result in civil penalties, in addition to the loan having to be repaid immediately with full interest for the period the loan was outstanding.
Purchase of Holiday Homes
Whilst in theory members of an SMSF can stay in a holiday house owned by the SMSF, there are limitations that prevent or discourage this from happening. Firstly, any members staying in the holiday house owned by the fund are required to pay for the use of the house at market rates. If a member does not pay rent at market rates and still stays in the house, they breach the sole purpose test, which is a very serious breach.
However, even if they do pay market rent and regardless of whether they stay for one night or 100 nights, the holiday house becomes an in-house asset. As mentioned earlier, the total of in-house assets must not exceed 5% of the value of the super fund, and therefore the in-house asset rule is likely to have been broken when purchasing a holiday home for members to stay in.
The most practical way to avoid this problem is not to own a holiday house within your super fund, unless you (or any other member or related party) never intend to stay in it.
Personal Use of SMSF Assets
While SMSFs can own investments such as jewellery, artworks and cars, this is an area fraught with danger. One of the most serious breaches in superannuation law is breaching the ‘sole purpose test’. If a member (or another related party) has received a personal benefit from the use of the super fund assets without paying for them, they have breached the sole purpose test. In fact the sole purpose test is probably the most common reason for SMSF non-compliance. Non-compliance effectively means the fund could be taxed at the highest individual marginal tax rate (i.e. 48.5%), as well as substantial penalties being levied against the Trustees who carry out (or fail to carry out) their duties.
Separation of SMSF Assets from Personal Assets
Failing to separate the assets of an SMSF from other assets owned by members or trustees can be disastrous. This is an area the Australian Taxation Office (ATO) is very concerned about. By not making clear distinctions about which assets belong where, the trustee loses the protection that superannuation would normally provide in a situation where bankruptcy becomes an issue.
Take the example of a person carrying on a business who is also acting as a trustee of an SMSF. If the business was to become bankrupt, and it was unclear which assets belonged to the business and which belonged to the super fund, the bankrupt (in other words the Trustee) could find that creditors may be able to claim the otherwise-protected assets of the SMSF.
A common way of avoiding such a breach is to maintain a corporate trustee and thus clearly demonstrate that assets are held by a separate entity.
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