Tim Miller, head of technical and education for Smarter SMSF, said in a recent online update that trustees need to be careful of “indirect” financial assistance that can be captured under s65 1b.
“Section 65 has two prohibitions. The first one is that the fund is prohibited from lending money to a member or a relative of the member which is pretty straightforward and takes on the concept of what is a loan,” he said.
“That is a prohibition under 65 1(a). Then you’ve got 65 1b, which is that trustees cannot provide any form of financial accommodation to the members or the relatives of the member. We, therefore, need to understand what financial accommodation means.”
Miller continued SMSFR 2008/1 provides a lot of technical background to a number of the key investment restrictions including what it means to give financial assistance to a member or relative.
“It lists quite a number of things that will be defined as financial assistance and tabulates them, going through a lot of examples of what they’re looking at from a financial assistance point of view such as whether the fund purchases an asset from a member, and did they pay more than they should have,” he said.
“There is also an acquisition of assets from related party rules to deal with – did the fund sell an asset to a related party and sell it for lower than commercial value? There’s no actual SIS restriction, there’s an arm’s length one, but it doesn’t breach the acquisition rules.”
Miller said the crux of the issue is really the sole purpose test and the concept that the SMSF is not there to provide any sort of current day financial benefits to the members until that current day is the payment of a pension or the payment of a benefit once you’ve satisfied the appropriate condition of release.
“The purpose of the fund is there to provide benefits in retirement, or upon turning 65, and you don’t want to provide any other sort of financial accommodation by utilising the fund’s assets to provide you with a benefit in today’s existence before you are legally able to access that,” he said.
“There is a broad range of things that are going to fit under that financial accommodation but it’s the more indirect financial assistance that can be captured under s65 1b that people have to be mindful of.”
Miller continued that it’s genuinely acceptable for a self-managed super fund to acquire business real property from a related party and it’s an exception to the in-house asset rules to then lease that business real property to a related party on commercial terms and there are NALI issues which may arise in these situations.
“But what we don’t talk about often is the rent payment and when that rent payment is made,” he said.
“People run into all sorts of issues with regards to the payment of rent, and often there’ll be a delay or a non-payment. One party being the member not paying rent is not the provision of financial assistance. But if the trustee says you don’t need to pay, that’s financial assistance,” he said.
“Under normal commercial terms, as the owner of that property, you would have a mechanism in place to collect that debt such as a lease agreement, and the terms and conditions that effectively govern the way in which that lease is operating.
“That’s really what the commissioner is angling at with a lot of these things, that what the trustee is doing outside of commercial reality is giving some form of financial accommodation to members or the relatives of those members.
“If you’re engaging in that sort of activity, then you are potentially in breach of section 65 and you need to rectify that situation which may be following the right protocols to collect debt.”
