Seven deadly super sins

If you have a self-managed fund, make sure you don’t break these golden SMSF rules.

Summary: SMSFs open up a new legal world to trustees – and there’s a lot of rookie mistakes to avoid. Here’s seven of the biggest do’s and don’ts.
Key take-out: If you have not updated your SMSF trust deed in some time, it’s probably time to do so. Changes in super laws over time, such as being allowed to borrow to purchase an investment property, probably mean that your trust deed is out of date.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

The purpose of superannuation is to provide retirement benefits to members. And you would think that there is no group more interested in providing these benefits than the trustees of SMSFs.

Often their intense interest in improving their lot is why they wrest back control from the larger fund managers, industry funds, corporate and even government sector funds.

But mistakes are mistakes. And they’re all too regularly made. Some of them are “sins” in the eyes of the Australian Tax Office, which could lead to astronomical fines. Others are just naughty and won’t help your cause if the ATO decides to pay your fund a little more attention.

Most SMSF contraventions are reported to the ATO – which governs SMSFs – by auditors, who may qualify the reports, leading to a headache or two for the trustees.

The list below is not exhaustive, but covers some of the larger wrongdoings reported by auditors to the ATO.

  1. Financial assistance/loans to members

This is traditionally the most common mistake made by SMSF trustees. The reason it occurs is often understandable. But that doesn’t make it excusable and the ATO doesn’t tolerate financial assistance or loans being made to members.

Typically, an individual gets into some sort of financial trouble. It might be tough times in their business, or having an extended, unexpected, period of unemployment. The individual is also the trustee of a SMSF (potentially with a partner, who might, or might not, know what is about to go on), which is sitting on a pile of assets. A loan is made from the SMSF directly to the member or a related party of the member.

It’s a breach of the sole purpose test – that a super fund’s sole purpose is to provide retirement benefits for members.

  1. In-house asset rules

Separate to the above, which is often not made deliberately as a loan, is the in-house asset rules. An in-house asset is a loan or an investment in a related party or trust of the SMSF.

In-house assets are limited to 5% of the value of the fund. That is, if the SMSF is worth $1 million, then they cannot invest more than $50,000 by way of a loan, investment or lease, to a related party of the fund.

There are a few exceptions. One of those is for commercial property. In this instance, the SMSF could own the commercial property being leased by a business that is related to one of the members. Market rent needs to be paid, and other conditions need to be met.

The 5% figure is a permanent and ongoing test. If your fund falls in value to $900,000, then you must insure that the value of related party assets has reduced from $50,000 to $45,000 ahead of that fall in value.

  1. Separation of assets

Co-mingling of assets owned by the individual and those owned by the SMSF also trips up too many trustees.

Not being able to show that the assets are separate and are provably so, opens up trustees to fines of up to $17,000 as of a year ago.

Where might this occur? Most commonly where a SMSF and the business owner have bank accounts at the same institution, or even use the same bank account. The problem was that until a year ago, the ATO didn’t have the power to enforce this rule. Now they do, so beware.

  1. Breaching the laws of your trust deed

As we all complain about too often, the rules in super change too often. The rate of change in the last decade has, literally, begun to turn people off superannuation.

But while the laws change regularly, your SMSF trust deed does not automatically keep up with those changes. Trust deeds are written as at a certain date in time, usually around the time you signed them to become the rules of your super fund.

As super laws change, don’t expect that your SMSF deed will be keeping up with that. It’s quite possible that a rule that came into effect in the last two years is simply not allowed by your five-, or eight-year-old trust deed. Gearing within super funds is a good example. The law didn’t change the first time until September 2007, so it’s unlikely a deed that predates that would allow super gearing.

Trust deeds need to be updated, particularly when you’re looking to do something new in your super fund.

  1. Breaching the sole purpose test

The “sole purpose test” is about ensuring that the fund is run with the sole purpose of providing retirement benefits for members on retirement.

Too many SMSF get into trouble on this test. The trustee, the member and the member’s relatives are not allowed to enjoy a direct or indirect benefit from the assets of the fund, prior to the member/s reaching retirement.

One of the most asked questions on this topic is in regards to beach houses or holiday homes. If your SMSF owns it, no, you can’t stay in them. Neither can your extended family, or other members of the fund.

  1. Investment strategies and insurance

Trustees must have a written “investment strategy” for their SMSF. This is the document that outlines the consideration given by the trustees to what types of asset classes they will invest in on behalf of their members and how much they might invest. It might also list which asset classes will not be accessed.

But from mid-2012, it became compulsory for SMSF trustees to consider insurance for their members as part of their investment strategy.

That does not mean they must take out insurance. It means that they must consider whether the member should be covered by some sort of insurance. The members might be of an age they cannot get reasonably priced insurance. It might be prohibitively expensive because of health conditions. The members might have taken insurance outside of super.

What’s important is to make sure that the trustees have detailed why they have, or haven’t, taken out insurance for their members.

  1. Borrowing

Borrowing by super funds is highly technical and a big hole for new SMSF trustees.

Prior to September 2007, there were very limited assets, which were largely internally geared, such as instalment warrants and geared managed funds. Nowadays, you can borrow money to purchase most assets that a super fund is allowed to invest in. And it then needs to be structured correctly.

The issue in regards to borrowing is actually more the reverse of the first rule I had above. The fund can’t just borrow money from anywhere to do something because it’s a little short of cash.

One exception is that SMSFs can, under limited circumstances, take a short-term loan to meet fund liabilities, such as paying a pension. But the loan cannot be for more than 10% of the value of the fund and the loan must be repaid within 90 days.

A super fund can be used to cover settlement delays, but only where the super fund did not believe that it would be required when the purchase was made. In this instance, the loan is again limited to 10% of the value of the fund and the repayment of the loan must be made within seven days.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au



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  • Self-managed superannuation fund (SMSF) administration platform provider, Xpress Super, has added a direct property option to its suite of investments. “With ongoing equity market uncertainty, trustees are looking for assets that are perceived to offer reliable income and longer term capital growth’” said chief executive Olivia Long. Recent ATO figures illustrate the growing popularity of direct property among SMSFs, rising from 10.7% in June 2006 to 14.7% as at March 2013, Long said.
  • The latest superannuation statistics from the Australian Prudential Regulatory Authority (APRA) show that both the number of SMSFs and their assets under management increased in 2012-13. SMSFs increased by 7% to 509,362 by June 30, 2013, while assets grew 15.3%, or $67.4 billion, to $505.5 billion. “It all points to a healthy SMSF sector with continual growth in the size of the sector and the assets that are being placed in SMSFs,” said Jordan George, senior manager, technical and policy, for the SMSF Professionals’ Association of Australia (SPAA).
  • The heads of the Financial Services Council and the Industry Super Network have criticised a report by CPA Australia that suggests growth in superannuation funds has come at the expense of other savings. ISN chief executive David Whiteley and FSC chief executive John Brogden said the CPA report, ‘Twenty years of the superannuation guarantee: The verdict’, was a “flawed and narrow assessment” of super that “adds little to an informed public debate on how to make the system better.”