Each year there are changes to the rules that govern superannuation and self-managed superannuation funds (SMSF), and for some fund trustees it can become difficult to remain compliant with ATO (Australian Taxation Office) laws.
Currently, there are three key issues that are causing the ATO some concern. If you are a trustee who has let some of the standard processes slip a little, a good place to start would be to understand these issues and check that your fund operations have not unwittingly become illegal.
The Sole-Purpose Test
The first issue is fundamental to SMSF and super regulation, and a key part of investment decision-making. It is the sole-purpose test, which means that to be eligible for tax concessions, an SMSF must be maintained for the sole purpose of providing retirement benefits to its members. While this seems simple enough, it is often misunderstood by fund trustees.
For example, recently the Federal Court dismissed an application by a fund trustee who was challenging the commissioner’s view that funds to provide accommodation for a member or relative was in breach of this rule. The Court agreed with the commissioner that leasing to a related party was contravening the sole-purpose test by using the fund assets for a purpose other than providing retirement benefits. This court decision has reinforced the sole-purpose test.
In-house Asset Rules
An in-house asset is a loan to, or investment in, a related party, an investment in a related trust, or an asset of the fund that is leased to a related party. A fund’s in-house assets cannot exceed 5% of its total assets, but unfortunately, a common regulatory breach being seen by the ATO regarding SMSFs is that funds are lending fund monies or assets to members or relatives of members of the fund.
Before going down this path, fund trustees are invited to contact the ATO for clarification or seek independent professional advice.
Unlawful Schemes and Arrangements
SMSFs have become prime targets for approaches by the unscrupulous to become involved in unlawful schemes and arrangements that may seem quite legitimate at the time.
ATO officers advise that these illegal arrangements are complex and cleverly hidden and can result in severe consequences for trustees and their funds. One such arrangement is to roll future retirement savings out of a superannuation fund and into an SMSF so that it can be withdrawn and used for a housing deposit.
This is illegal and the ATO is concerned that SMSF fund members are being targeted with these and similar arrangements that could result in fund members losing their life savings. The ATO is always available to assist trustees, and there are reputable professional advisors available to trustees who have been approached with a scheme and are confused about what to do.
There are also many reputable companies such as SMSF Assure working in the industry that are not licensed to provide financial product advice but are experts in fund administration. By having their assistance with the compliance and reporting part of your SMSF, fund trustees can then turn their full attention to the financial products and investment opportunities in the market, without falling prey to market predators.