Tim Miller, head of education for Smarter SMSF, said the ATO recently issued a warning that SMSF trustees should avoid using their funds to pay bills or buy Christmas presents, but it is not just in the festive season that this advice is relevant.
“Year in, year out, we highlight this quite regularly. The number one breach from an SMSF point of view since breaches have been reported has been the provision of financial assistance to members or relatives,” Miller said.
“It’s often associated with the ease of access to the funds via the cash management account and so often people will go, ‘I’ll just use this quickly to get through this event and then I’ll pay it back’. But once the money is withdrawn it’s not coming back and unless you have met a condition of release, you have illegally accessed money and have created compliance breaches in the fund.”
Aaron Dunn, CEO of Smarter SMSF, said this could result in a tax imposition to an individual who has no concessions, but ultimately any penalties that may be imposed will apply to the trustee of the fund due to the fact that they have provided financial assistance.
Miller added that there are civil penalties for the most extreme cases, as well as administration penalties and financial assistance penalties that would impose 60 points on the fund.
“That’s a liability that has to be met by the trustee in their individual capacity, not in the super fund capacity, so it becomes a bit of a catch-22 because if you use fund resources for personal purposes, and you’re penalised and have another personal liability; you get caught in a circle,” he said.
“This is the issue, people are jumping into their super, and utilising it because they don’t have the financial means and get themselves stuck in a vicious cycle of using it, repaying it, using it, repaying it, but every time you do it, it’s an illegal access and it’s a contribution.”
However, Dunn said there are some legal ways where financial assistance can be provided to a related party.
“It’s a troubled piece of legislation to me in the sense that the in-house asset definition is a long-standing definition and because loans to members and loans to other entities were something that, prior to the SIS Act, the rules were a little bit different,” Miller said.
“When the in-house asset rules were introduced, the old rules started to define who a related party was, and who it was acceptable to have a loan to, which was largely a company or a trust, and that loan is restricted to 5 per cent of the value of the fund assets.”
However, he said, the rules also state that the loan can’t be used to provide financial assistance to the member or relative through the company or trust.
“If the legitimate reason for the loan is for operational purposes such as for business growth or research and development, and as long as the loan documentation is all arm’s length it will not attract the attention of the ATO.”
Dunn added that documentation becomes key and trustees need to ensure that they are benchmarking the rate they are ultimately providing, and ensuring that they are upholding the conditions of repayment.
“If you end up loaning the money but you’re not enforcing a loan like a lender would otherwise ordinarily do, then you are putting the fund into a precarious position as well,” he said.
