Three common SMSF breaches and how to avoid them

Self-managed superannuation funds (SMSFs) now account for almost one-third of all superannuation in Australia. They have become popular with many Australians as an SMSF enables them to take more control of their superannuation and adopt investment strategies that may not be possible with traditional industry or retail superannuation funds.

Every year, the Australian Tax Office (ATO) reports a summary of all the breaches SMSFs make. A breach is where the Trustees of an SMSF have done something that contravenes the superannuation rules. Around 2% of all SMSFs report a breach each year. Thankfully, half of these funds have rectified the breach before the financial year is over.

1. The buck stops with you

Even if you engage the services of an accountant or a financial planner, as Trustee of your own SMSF, the buck stops with you. It is the responsibility of the Trustees to ensure the fund acts within the rules and
laws of the superannuation system.

Generally speaking, the easiest test for SMSFs is the ‘sole purpose test’. This test states that all the investment activities of the SMSF must be for the sole purpose of generating capital growth and income return to support the provision of an account based pension at retirement.

For example, if your SMSF purchases an investment property and leases the property to an unrelated tenant at market rates – the SMSF meets the sole purpose test. However, if the SMSF purchases an investment property and anyone who is a member of the fund or deemed to be a related party of a member of the fund uses that property the sole purpose test is breached.

This includes any siblings, children, or blood or marital relatives of an SMSF member as well as any business associates. The reason for this is that a benefit, other than providing for a pension, is being received by a related person to the fund.

2. Keep good records

Another common breach made by SMSFs is in an area called in-house assets. An in-house asset is where a fund may partially own an interest in an investment that is also owned by one of the members of the SMSF. For example, shares in a private company.

There are limits of how much of the SMSFs assets can be allocated to in-house assets – a maximum of 5%. This is one of the most common types of breaches. Without good record keeping of the fund’s investment activities and the decisions made by the Trustees, breaches around areas such as in-house assets become common.

Conversely, advisers should always ensure they have accurate notes that summarise any conversation or meeting with clients so that there are always records of decisions, as well as the position of their clients’ SMSF.

With new continuous reporting obligations set by the ATO, your accountant should be considering moving your SMSF to a monthly reporting basis.

Additionally, it’s a good idea for advisers and planners to always pre-schedule the next review with clients six months in advance. This thereby ensures that all parties are always on top of the financial position of the SMSF.

3. Don’t be cute

SMSF rules and regulations are not something to be pushed. An example of this is when a SMSF lends money to their members. This is a big no-no!

Ultimately, if you have any ideas about making a new investment decision in your SMSF ask your adviser first. The consequences of being rendered a noncomplying fund is that 45% of the gross value of the fund’s assets will be paid to the ATO. This is a big penalty to pay for being too cute.

By Andrew Zbik
Omniwealth Financial Planner
This article has previously appeared on Morningstar.com.au
This article has been prepared by Morningstar Australasia Pty Limited for general use only without reference to your objectives, financial situation or needs. You should seek your own advice and consider whether the advice is appropriate in light or your objectives, financial situation and needs.