Earlier this year I wrote about changes to the registration process when an SMSF applies for an ABN and to become a regulated fund (see, why staple $5 to your new SMSF). For an SMSF to be established, it must first have assets – this being a trust law principle. This requirement must be demonstrated when it comes to registering for an ABN, as the Australian Taxation Office (ATO) will refuse an application where the fund has no assets.
Therefore, the fund must be established by way of an initial contribution, transfer or rollover. This can however present some more practical challenges when opening a new bank account as the financial institution will typically request the TFN and/or ABN to be provided. Starts sounding like the ‘chicken and egg scenario’… which comes first? The issue is compounded further where individuals of a new SMSF may be ineligible to make a contribution into the fund as they cannot meet a work test (beyond age 65).
The ATO has recently published updated guidance to assist understanding how a fund becomes entitled to an ABN and address some of these practical issues. Most importantly, the regulator makes it clear that the amount establishing the fund does not need to be deposited into a bank account initially for the fund to have been established. By ‘holding’ a nominal amount (e.g. $10), the fund can apply for the ABN and once issued, the bank account can be opened and the $10 deposited. Such amount would be regarded as a contribution for a member.
Where the member is ineligible to make contributions, by virtue of their age (over 65 and does not meet the work test), the ATO has indicated that they will apply an administrative discretion to allow a nominal contribution to be made by the member to ensure the fund is established. Any such nominal contribution that is made must be allocated to the member solely for the purpose of registering the fund and the member must receive further money into the SMSF (i.e. rollover) before the end of the income year the fund was established.
It is good to see this practical approach taken by the regulator to ensure that would be SMSF trustees are establishing their fund correctly.