How to avoid the three most common SMSF mistakes

3 min read

The self-managed super fund (SMSF) environment is complex, and extensive regulations govern how funds are administered. 

This means it's easy for members to make mistakes with their fund.

According to the Self-Managed Super Fund Association, there is a range of common mistakes SMSFs make. These include the fund not meeting the sole purpose test of providing retirement and death benefits to members, providing loans from the fund to members and contributing more than the contribution caps allow.

To help SMSF members and their advisers reduce the risk of error, the Self-Managed Superannuation Fund Association’s head of policy, Jordan George, outlines three of the most common mistakes and how they may be rectified.

1. Making loans to members

Under super rules, it’s not permissible for the fund to provide financial assistance or make loans to members of the fund. Mr George says members often make these loans by mistake.

“Typically, this happens when a member withdraws money from the wrong bank account. Problems may also occur when a member transacts with or provides assistance to a member’s relative,” he says.

This may happen if the member is not clear about the definition of a relative which is broad under the superannuation rules.  SMSF members can make limited loans to related parties of the fund as long as the loans comply with the in-house asset rules. So, if you lend money or provide financial assistance from your SMSF you need to check you will not contravene the super regulations.

Mr George’s advice to help prevent this mistake is to engage and educate clients on an ongoing basis about the SMSF rules. Make sure they understand who is considered to be a related party or relative and keep a close watch on clients’ SMSFs to ensure members are not breaching the rules.

“Be very careful clients don’t accidentally withdraw funds from their SMSF to use themselves when the fund is not in pension mode. If members do make a mistake, approach the ATO to let them know about the error and rectify it as soon as you can by putting the money back in the fund,” he says.

2. Contravening the in-house assets test

Under the in-house asset rules only 5 per cent of the fund’s assets may be apportioned to investments owned by a member’s related party in the form of an in-house asset.

“The key here is regularly valuing the fund’s investments so you can understand the level of in-house assets in the fund. If trustees do contravene this rule, they have 12 months to ensure the value of in-house assets is below 5 per cent of all assets. This means trustees are not necessarily forced to sell assets quickly,” George says.

“Advisers have a role to play educating clients about what's considered to be an in-house asset. If clients do invest in these types of investments, make sure you monitor them to reduce the risk of breaching that 5 per cent limit,” he adds.

3. Separation of assets

SMSF assets must be segregated from clients’ other assets so it’s clear which assets receive the preferential tax treatment the super environment affords. George says it’s easier than people think to co-mingle assets.

“Problems happen when people mix the assets they hold personally with assets held by their SMSF. The key here is making sure assets are registered in the correct name, and are held separately,” he explains.

To reduce the risk of making this mistake, ensure the SMSF has separate bank accounts to the members’ personal accounts. Making sure a corporate trustee’s name is on the share register and any property titles, rather than registering assets in the member’s own name, also helps to reduce the propensity for error.

“This is really important to show assets are owned by the SMSF and not by the individual. Sometimes we see mistakes when a corporate trustee is a trustee of multiple funds. So we recommend the corporate trustee only holds assets for the SMSF,” Mr George says. This is instead of appointing an individual trustee instead of a corporate trustee.

This shows, while it’s easy to make mistakes around an SMSF, putting in place the right structures from the outset helps reduce the risk of error and ensures the fund remains compliant.

Want to know more about BT's SMSF solutions?
Business Development 07 May 2018
Interest in self-managed superannuation funds (SMSFs) and potential for revenue growth is an opportunity for many accounting firms.
3 min read
Business Development 27 Apr 2018
Advances in cloud technology and greater integration with accounting and administration software are assisting with efficiency.
3 min read
Essentials 27 Apr 2018
There are three steps to consider when you choose a cash account for your client's SMSF.
3 min read

This publication is current as at 15 January 2019, and has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘BTFG’), which is part of the Westpac group of companies (Westpac Group). This document has been prepared for the information of financial advisers only and must not be copied, used, reproduced or otherwise distributed or made available to any retail client or third party, or attributed to BTFG or any other company in the Westpac Group.

The information contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The publication does not contain, and should not to be taken to contain, any financial product advice and it has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this publication, consider its appropriateness to your clients, having regard to their objectives, financial situation or needs. Any taxation information contained in this publication is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual client’s situation may differ, and your clients should seek independent professional taxation advice on any taxation matters. Any graph, case study or example contained in this publication is for illustrative purposes only, and is not to be construed as an indication or prediction of future performance or results. Where past performance is used, please note that past performance is not a reliable indicator of future performance. While the information contained in this publication may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of BTFG or any member of the Westpac Group that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training and should therefore not be relied on for the purposes of making any financial recommendations or an investment decision. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and (b) no member of the Westpac Group is in any way liable to you (including for negligence) in respect of any reliance upon such information.

This publication may also contain links to websites operated by third parties (‘Third Parties’) who are not related to the Westpac Group (‘Third Party Web Sites’). These links are provided for convenience only and do not represent any endorsement or approval by the Westpac Group of those Third Parties or the information, products or services displayed or offered on the Third Party Web Sites.