Written by Peter Burgess, Deputy CEO / Director of Policy & Education, SMSF Association
Despite the strict rules which prevent or severely limit such activity, there is often a tendency for SMSF trustees to enter into transactions with themselves or relatives using the financial resources of their fund to offer assistance.
However, as the prices of property continue to rise in Australia, the affordability of property may be out of reach for many SMSF trustees particularly when there is a need to consider the risks with the lack of diversification should you invest all your retirement savings into a single lumpy asset. A unit trust may provide an alternative structure to pool superannuation and non-superannuation resources to own real property.
Through a unit trust, your SMSF could acquire a portion or a “fraction” of an investment property which would entitle your SMSF to receive the equivalent proportion of the rental income and of any capital growth. Put simply, a unit trust structure allows your SMSF to buy a portion of a property and get all the benefits of owning the property without the upfront expense.
While in percentage terms the number of SMSFs with reported breaches of the rules is very small (around 2 per cent of all SMSFs), there are still over 10,000 reported cases each year of SMSFs providing financial assistance to members and relatives. This includes loans to members and other situations where the SMSF may have invested in a related entity beyond the allowable 5 per cent limit.
While SMSFs can provide a great deal of investment flexibility it is important SMSF members understand there are limits to this flexibility. In our experience, there are two main reasons why, year after year, financial assistance breaches remain the most common type of contraventions committed by SMSF trustees.
Firstly, some trustees are simply not aware that a loan from their SMSF to a fund member, or a relative, is a breach of the rules. Some see it as a perfectly sensible transaction given it would involve the loan interest being paid to their fund rather than to a financial institution.
However, there are strict rules in place which are there to protect superannuation savings. When it comes to dealing with related parties, our assessment of the risks involved is often clouded and our judgement is not as objective as it would otherwise be. It is this counterparty risk the rules are designed to avoid.
The second main reason why breaches of the financial assistance rules are more prevalent than other breaches is that the definition of what constitutes financial assistance in the legislation is complex and very broad. It includes things like fund assets being sold to members or relatives at less than their market value, the SMSF being guarantor for a member loan, and releasing a member from a financial obligation owed to the fund.
Given the devastating financial impact of the global pandemic, it may be tempting for some SMSF members to use their SMSF as a source of short-term financial assistance. Earlier this year the legislation was amended to allow superannuation members, including SMSF members, who have been financially impacted by the global pandemic to access up to $10,000 early from their superannuation savings in the 2019/20 income year and another $10,000 in the current financial year until 31 December 2020.
However, it is important SMSF trustees understand the strict rules which apply and that they do not access their superannuation savings early from their SMSF in other circumstances, even if it is only for a short period of time.
If you do find yourself in a situation where your SMSF has inadvertently breached the financial assistance rules, or any rules for that matter, it is important to rectify the breach as soon as possible. This generally means returning your fund to the position it would have been in if the breach had not occurred.
If you are unable to rectify the contravention straight away, you should voluntarily disclose the contravention to the ATO via their SMSF early engagement and voluntary disclosure service. This service enables SMSF trustees and professionals to engage early with the ATO in relation to unrectified contraventions, rather than waiting for the contravention to be reported to the regulator by your SMSF auditor.
It is expected that prior to utilising this service, trustees will have already developed a plan to rectify the contravention as soon as possible. It is important to provide the ATO with all the relevant facts, supporting documentation and a rectification proposal and to actively engage with the regulator throughout the resolution process.
If you do voluntarily disclose unrectified contraventions before the ATO commences an audit, your disclosure will be considered in determining the enforcement action it takes and the appropriate level of remission of administrative penalties.
Before entering any transaction with a related party, its important that SMSF trustees understand the rules which apply. You should seek professional advice, preferably from a licensed SMSF Specialist, if you are not sure what restrictions and prohibitions apply.
If you have not yet reached age 65, or have not yet satisfied one of the other superannuation cashing conditions, when it comes to your SMSF and your superannuation savings, it’s always worth remembering – it is your money, but not yet!