The Seven Deadliest Super Sins. SMSF s

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1 The Seven Deadliest Super Sins SMSF s

2 A word of warning The fines outlined within this booklet are PER trustee. If you are a corporate trustee, you will be fined once, but if you have individual member trustees you can be fined up to 4 times for the one offence.

3 Australians have the option of managing their own retirement investments by opening a self-managed superannuation fund. Below are five key benefits which may arise from choosing this strategy. 1. Generally lower fees than a retail or industry fund; 2. Increased control, as you are able to select from a wide range of investment options and can alter your investment mix as desired; 3. The option to consolidate your super balance with up to three other people can open up greater investment opportunities through increased available funds; 4. Assets, such as shares, managed funds, and commercial property, (including your business premises) can be added to the SMSF allowing the consolidation of family assets. 5. Estate & tax planning flexibility you can use strategies to reduce tax and control how your benefits are distributed on death. While these are all great benefits, they do come with a range of obligations. The ATO has recently changed the rules pertaining to SMSFs. What many Australians don t realise is that they are at serious risk of being heavily fined for mismanagement of their funds. This is a risk regardless of whether their actions were intentionally in breach of the legislation or not. This booklet has been written to highlight seven common scenarios in which SMSF trustees can find themselves in breach of SMSF legislation. By being aware of these common mistakes, you may be able to avoid facing thousands of dollars in fines. Deanne Firth Director, Tactical Super

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5 SCENARIO 1 Scenario: Your son or daughter wants to buy a new car, so you lend him or her the money from your SMSF at a commercial rate of interest. Logic: You believe it s a good deal for your SMSF, because the interest rate your son or daughter will pay is higher than what you would be getting by simply keeping the money in your term deposit. Rule: A fund cannot lend money or give financial assistance to a member or their relatives, regardless of whether they pay interest. Fine: $10,200 per trustee is payable. For example, if you and your partner are both trustees of the same SMSF that funded the loan, then you might expect to pay $20,400. Superannuation Industry (Supervision) Act 1993 S65 The trustees must not loan monies or provide financial assistance to any member or relative at any time during the financial year See SMSFR 20081/ for ATO examples The Seven Deadliest Super Sins 5

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7 Scenario 2 Scenario: You purchased an apartment in Noosa using your SMSF, the value of which is more than 5 per cent of the fund s total assets. You would like to spend a week s holiday at the apartment, and plan on paying a market rent to the fund. Logic: Because you ll be paying the market rent, the fund will receive the same amount of money it would from anyone else. Rule: Even if they pay the market rent, a fund member cannot stay in the apartment. This is because an asset leased to a fund member is classified as in-house, and a fund is only allowed to have up to 5 per cent of its assets as in-house. The same fine would occur if any fund member s relatives stayed in the apartment. Fine: $10,200 per trustee. Superannuation Industry (Supervision) Act 1993 The trustees must comply with the S80-85 in-house asset rules The Seven Deadliest Super Sins 7

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9 Scenario 3 Scenario: You log into internet banking, and accidently transfer money out of your SMSF to pay your private electricity bill. Logic: It s really easy to get your online accounts confused, and accidently send payments from the wrong account. Rule: The payment of the electricity bill is considered to be the SMSF providing financial assistance to a member, and could be classified as the illegal early release of super. Fine: $10,200 per trustee. Superannuation Industry (Supervision) Act 1993 S65 S52(2) (d) or Reg 4.09A The trustees must not loan monies or provide financial assistance to any member or relative at any time during the financial year The assets of the SMSF must be held separately from any assets held by the trustee personally or by a standard employer sponsor or an associate of the standard employer sponsor The Seven Deadliest Super Sins 9

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11 Scenario 4 Scenario: Your business rents its workshop from your SMSF, but things have been tough lately so you stop paying the rent. Logic: It s my money anyway, so it won t matter if I don t pay rent until things pick up again. Rule: All transactions must be maintained at arm s length. An external property owner would not excuse rental obligations just because the person responsible for paying was having a tough time financially. Fine: $10,200 per trustee Superannuation Industry (Supervision) Act 1993 S109 All investment transactions must be made and maintained at arms-length that is; purchase, sale price and income from an asset reflects a true market value/rate of return The Seven Deadliest Super Sins 11

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13 Scenario 5 Scenario: You dislike dealing with paperwork, so when you receive documents from your accountant, you throw them straight in the bin. Logic: Everything is kept electronically these days, so my accountant will have a copy of everything meaning I shouldn t have to store anything physically. Rule: Trustees must keep minutes of all meetings, and retain them for a minimum of 10 years. Fine: $1,700 Superannuation Industry (Supervision) Act 1993 s. 103 duty to keep minutes. The trustees must keep minutes of all meetings and retain the minutes for a minimum of 10 years. The Seven Deadliest Super Sins 13

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15 Scenario 6 Scenario: Your son or daughter puts some money into your SMSF. He or she becomes a trustee, but doesn t sign the application for membership, or the ATO trustee declaration. Logic: With so much paperwork these days, it can be easy to forget to process the trustee declaration. Rule: The ATO trustee declaration must be signed within 21 days of becoming a trustee. Fine: $1,700 Superannuation Industry (Supervision) Act 1993 s. 104A(2) declaration relating to trustee duties Trustees who became a trustee on or after 1 July 2007 must sign and retain a trustee declaration The Seven Deadliest Super Sins 15

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17 Scenario 7 Scenario: You keep accidentally paying the SMSF s accounting fees from your personal bank account, instead of from your SMSF. Six months later you reimburse yourself from the fund s account. Logic: It s my money anyway, so it won t matter which account I use to pay the fees from. Rule: SMSFs must not borrow money or maintain an existing borrowing (except in specific exempted circumstances). By receiving money from outside sources, and not immediately reimbursing them, the fund is deemed to have borrowed money. Fine: $10,200 Superannuation Industry (Supervision) Act 1993 s. 67(1) borrowing prohibition The trustees of the fund must not borrow any money or maintain an existing borrowing (not listed as an exemption) The Seven Deadliest Super Sins 17

18 Summary of Fines The contraventions which will be subject to administrative penalties are as follows: Provision of the SIS Act Penalty units Fine (AUD) s. 34(1) prescribed operating standards 20 3,400 s. 35B accounts and statements The trustees must prepare, sign and retain accounts and statements s. 65(1) lending prohibition The Trustees must not loan monies or provide financial assistance to any member or relative at any time during the financial year. s. 67(1) borrowing prohibition The trustees of the fund must not borrow any money or maintain an existing borrowing (not listed as an exemption) s. 84(1) in-house asset rules The trustees must comply with the in-house asset rules s. 103(1) duty to keep minutes two or more trustees The trustees must keep minutes of all meetings and retain the minutes for a minimum of 10 years 10 1, , , , ,700 18

19 s. 103(2) duty to keep minutes one trustee The trustee must keep minutes of all meetings 10 1,700 and retain the minutes for a minimum of 10 years s. 103(2A) retention of election relating to geared investments 10 1,700 s. 104(1) record keeping 10 1,700 s. 104A(2) declaration relating to trustee duties Trustees who became a trustee on or after 10 1,700 1 July 2007 must sign and retain a trustee declaration s. 105(1) member reports 10 1,700 s. 106(1) notification of significant adverse events 60 10,200 s. 106A(1) notification of change in status of an entity 20 3,400 s. 124 appointment of investment manager new s. 160(4) compliance with an education direction s. 254(1) provide information to regulator s. 347A(5) participation in statistics program Note The value of one penalty unit is currently $170: s. 4AA of the Crimes Act 1914 (Cth). Accordingly, the above administrative penalties per breach will range from $850 to $10,200. The Seven Deadliest Super Sins 19

20 Talk to Us Tactical Super - SMSF Audit Specialists admin@tsaudits.com.au