The ability to take control of your retirement savings is a key driver in the continued growth of SMSFs. However, being a trustee comes with responsibility to ensure that your fund meets strict regulatory and compliance obligations. Failure to meet these can result in significant penalties, along with the potential loss of the fund’s complying status.
Here is a list of 12 things not to do with your SMSF:
1. Do not setup a fund to illegally access your super
The approach taken to illegal early release of superannuation benefits by the ATO has seen a significant increase in the amount of people setting up SMSFs to gain access to their retirement savings. Even with existing funds, it can be tempting to access money from the SMSF bank account where a business is in financial difficulty. You should avoid this as significant penalties and criminal sanctions can be applied by the Regulator. In addition, any benefits withdrawn are likely to be assessed personally at the highest marginal tax rate. It is important to remember that there are options available to access part of your superannuation under financial hardship or compassionate grounds.
2. Do not transfer residential property you own into your SMSF
This is one of the most common questions I get asked by individuals as people begin to take a greater interest of shifting wealth into superannuation. Superannuation law does not allow for the acquisition of assets from members (s.66, SIS Act). There are however exceptions to this rule including listed shares (until 30 June 2012), widely held trusts, business real property and in-house assets (up to 5%). Residential property is not an exception and therefore not allowed to be acquired or contributed into the fund from a member.
3. Do not provide financial assistance to you or a family member from your SMSF
Another common question is whether a property purchased by Mum & Dad in their SMSF can be leased (at arm’s length) to a child or other family member. Whilst the intention may be to deal on ‘commercial terms’ (arms-length) with the tenant, the fact that they are related prohibits the ability to do so. You are deemed to be providing financial assistance, along with breaches of various other aspects of super law (e.g. sole purpose test).
4. Do not try to re-report contributions just because you’re now in an Excess Contributions Tax position
A key focus of 2011/12 ATO compliance program is to investigate re-reporting of contributions for members through the SMSF Annual Return. An updated Superannuation Prosecution Plan for July 2011 to June 2014, outlined that the ATO intended to target issues of excessive contributions where SMSF members seek to avoid or reduce the excess contributions tax by falsely reporting contributions (including amending). You don’t want to find yourself on the wrong end of the stick with this issue – as penalties and criminal sanctions on top of an ECT liability will make things look very ugly!!
5. Do not lodge your SMSF Annual Returns beyond the due date
It must frustrate the ATO that year after year the on-time lodgement statistics are not better than what they are. In a speech conducted by Stuart Forysth, Assistant Commissioner, Superannuation in September last year, he commented that 79.39% of all 2010 lodgements had been achieved by 5 July 2011. That’s more 20% not done 12 months after the end of the financial year. The ATO will be pleased with the increased powers they are to receive from 1 July 2012 via the Stronger Super reforms to penalise trustees for tardiness. There is however scope for the ATO to enforce non-compliance on SMSFs, however this ‘nuclear’ option is rarely enforced. See my previous post on this topic.
6. Do not have the title to a property held by the trustee where SMSF limited recourse borrowing arrangement is in place.
I have heard of some ‘horror stories’ of how certain limited recourse borrowing arrangements have unfortunately been established. Most common is the title to the acquired property is held in the name of the SMSF trustee, not the custodial trustee. You must ensure the asset is held in the bare/holding trust whilst the loan is in existence, which means the title must be held by the trustee of the bare trust. You need to consider state-by-state jurisdictions around stamp duty requirements, but I always recommend having the custodial trustee established before purchase (rather than rely on a nomination clause – as allowed in some states).
7. Do not use borrowed funds to make property improvements
With clarity in September 2010 by the ATO on key concepts with limited recourse borrowing arrangements, SMSFs can now make improvements to property assets to the extent that you don’t change it into a different asset (i.e. character and nature of property changes). Importantly, SMSFR 2011/D1 confirms that improvements can be made with the SMSF’s own resources (e.g. cash), but not with borrowed funds – this is an important distinction between the two!! s.67A(1)(a)(i) only allows for borrowings to be maintained for the acquisition of a single acquirable asset along with any associated costs in repairing or maintaining the asset – no improvements!!
8. Do not have the fund assets mixed up with your personal or business assets
All fund money and assets must be kept separate from personal or business money and assets. You mustn’t use the fund’s money for personal or business purposes under any circumstances. This is a covenant with superannuation law to ensure that fund investments are made only to provide for members in retirement.
9. Do not have you super fund audited by the same tax agent that prepares your SMSF financials and Annual Return
The issue of independence within the SMSF audit community has been progressively improving through increases in professional standards requirements and now we’ll see further improvements through the Stronger Super reforms (ASIC auditor registration). As a trustee you need to be conscious that it is highly probable that where an accountant providing the administration is also auditing the fund is in breach of their professional obligations (referring to APES 110 – Code of Ethics for Professional Accountants). This is predominantly relevant to sole practitioners and smaller public practices.
10. Do not contribute into superannuation if your were 65 or older from 1 July 2011 and you have met the ‘work test’
Unless you meet a work test of completing 40 hours work within a 30 day consecutive period, you are in eligible take make personal contributions into super. Any contributions made into superannuation cannot be accepted by the fund and must be returned.
11. Do not access your superannuation unless you have met a ‘condition of release’
We discussed illegal early release earlier, but it is important to understand that to access superannuation money by lump sum or pension you must meet a condition of release, for example retirement.
12. Do not take an amount less than your prescribed minimum pension for the financial year
The ATO has confirmed within tax ruling TR 2011/D3 that where a member does not meeting their minimum pension obligation for the financial year, the fund loses its tax exemption from the start of the financial year and all benefits are treated as lump sums. This means that the fund moves from a 0% tax rate in pension phase back to 15%. This will also affect the tax-free/taxable proportions of, the pension accounts, including where multiple pensions were running the accounts move back to a single member interest in the fund.
The Government’s Stronger Super reforms to take effect from 1 July 2012 are providing the ATO with greater powers to adopt a sliding scale administrative penalty regime based on the seriousness of breaches conducted by trustees. It is commonly known up until this stage the ATO really only had two options to enforce compliance – a feather duster or the ‘nuclear’ option; there was no in between. These new powers will allow the Regulator to determine how hard they need to hit to ensure trustees comply with their obligations, which may include mandatory education.
I’d be interested to hear from my readers further areas that trustees should ensure that they ‘steer clear’ of when it comes to maintaining the complying status of their SMSF?