DISCOVER THE MOST COMMON BREACHES OF SMSF LAWS AND REGULATIONS
It’s a serious responsibility to manage an SMSF and you risk a number of serious penalties if your SMSF fails to act in accordance with the relevant superannuation laws and tax regulations. Some of the most common breaches are as follows:
1. Loans to members
Personally lending money or providing financial assistance to members or their relatives is not allowed, regardless of the nature of the loan or how soon it is repaid. Even if you withdraw money from the fund accidentally, you could attract a hefty fine. As trustee, the money in the fund must be used for the sole purpose of generating an income for members in retirement. Any transactions with members and relatives must be conducted at an arms-length basis, which means assets must be sold to members at market value. You must not release members or their relatives from their obligations to the SMSF, take on their financial obligations, or provide security using SMSF funds for their benefit. To avoid breaching this regulation, it’s important to maintain separate bank accounts for SMSF funds and individual or business funds.
2. In-house assets
Your SMSF fund can lend money to a ‘related party’ such as a member or relative’s business, but it must comply with the in-house asset rule, which limits the loan to no more than five percent of the fund’s assets at any one time. This requires constant monitoring as well as a written plan to dispose of any in-house assets that breach the five percent level. There are some exceptions to this rule, including business real property leased to a related party, investments in widely-held trusts, tenants-in-common property ownership and certain investments in related non-geared entities. Your SF Wealth financial adviser will be able to determine whether the loan you are planning is in breach of the in-house asset rule.
3. Failing to lodge income tax returns on time
It’s important to lodge the tax return of your SMSF on time, or risk penalties for late lodgement. The dates you need to lodge your tax return may vary, depending on whether the return is lodged by you or a registered tax agent, whether the SMSF is newly registered or if it has outstanding returns.
Other breaches Other common breaches of SMSF laws and regulations include:
- Failing to prepare financial accounts and statements when required
- Borrowing funds outside the limited recourse borrowing arrangement
- Failing to keep appropriate records and reports for specified periods
- Failing to comply with preservation rules that set down when super benefits can be withdrawn
- Failing to notify the Australian Tax Office (ATO) of changes to the SMSF or events that have an adverse effect on the financial position of your fund.
PENALTIES
The ATO has significant powers to issue SMSF trustees with penalties if they breach superannuation laws or tax regulations.
These may include:
- Administrative penalties and general interest charges, including maximum tax rates on income and market value of SMSF assets
- Implementation of an education directive for all trustees in the SMSF, which involves undertaking a specific course of education and showing the ATO that is has been completed successfully and within the timeframe allocated
- Disqualification and removal of trustees
- Freezing SMSF assets
- Losing your status as an SMSF and the tax concessions available to you as trustee of the fund, including Capital Gains Tax (CGT) and pension tax exemptions
Civil penalties which must be paid personally by the trustee
Criminal charges against the trustee, which may be punishable by imprisonment of up to five years.
The ATO will only exercise discretion where an attempt has been made to rectify the breach and ensure compliance in the future.
Talk to your SF Wealth financial adviser about making sure your SMSF is compliant with all laws and regulations, so you can avoid these penalties. This information is general in nature and does not take into consideration your personal circumstances. Talk to your SF Wealth financial adviser for SMSF advice that’s right for you.
