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.
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