Managing an SMSF can be difficult. However, with the right skillset, effective organisation and specialist advice, SMSFs can be a great vehicle to fund your retirement.
Each year the Australian Tax Office (ATO) releases the most common mistakes that SMSF trustees make when administrating their SMSF. Unfortunately, these mistakes continually revolve around an SMSF being too closely linked to personal assets and related members. Furthermore, penalties for breaches of these regulations can be severe if trustees don’t act quickly to rectify their mistakes.
So what are 3 of the most common SMSF mistakes and how can they be avoided?
1. Lending money to members and providing financial assistance
An SMSF is unable to lend money or provide direct or indirect financial assistance to a member or a member’s relative. This can include a loan to a trust or a company where a member or their relative is indirectly getting that financial assistance because they are a shareholder or a beneficiary.
Normally this breach is caused by a lack of awareness by SMSF trustees and the wide range of transactions that sometimes take place with related parties or businesses owned by related parties involved.
The easiest way to avoid this issue is to avoid dealing with related parties in any way with your SMSF. If you choose to deal with related parties, then it is important you understand the definition of ‘relative’ and ‘financial assistance’ in the superannuation legislation and seek specialist advice.
2. Breaching the ‘in-house asset’ rules
SMSFs also commonly breach the in-house asset rules which means trustees cannot invest in assets that involve related parties of the fund. An in-house asset cannot be more than 5% of the SMSF’s total assets each financial year.
A related party will include the fund’s members, their relatives, and entities such as companies or trusts that are controlled or majority-owned by members and their associates (that is, relatives of members, partners in partnerships with those members, and companies or trusts that are controlled or majority-owned). For example, investing in a unit trust that is controlled by the SMSF trustees.
Yet again, the easiest way to avoid this breach is to consider avoiding in-house assets all together. However, if you do have an investment that is with a related party, check the valuation regularly, seek advice and engage early with the Australian Tax Office if you find an issue.
3. Failing the required separation of assets
Trustees fall foul of this rule when they do not keep their personal and business assets separate from their assets held within their SMSF. This normally occurs because trustees do not register their assets with the correct name and SMSF assets are mistakenly registered as a personal asset.
Therefore, all assets of the fund must be appropriately registered in the names of all trustees or in the name of the corporate trustee of the SMSF. It is equally important to check your SMSF bank accounts and listed shares as it is to check property and unlisted assets.
Furthermore, to protect fund assets in the event of a creditor dispute, and prevent costly legal action to prove who owns them, assets should be recorded in a way that distinguishes them from your personal or business assets and clearly show legal ownership by the fund.