‘Noticeable’ spike in SMSF borrowing breaches
There has been a “noticeable” increase in the breaches arising from SMSF borrowings, according to new research from one advisory firm.
Partners Wealth Group’s annual research of 600 audited funds found of the five per cent of funds in breach last year, 23 per cent stemmed from the contravention of borrowing requirements.
This is up 11 per cent from the previous year, Partners Wealth Group stated.
Surprisingly, only one of the SMSFs in breach of taking loans related to a fund acquiring property via an LRBA.
“Because borrowing via an LRBA is relatively new and has been subjected to several rule changes since inception, my suspicion is that there has been confusion, resulting in some SMSF trustees thinking it was permissible to use their fund to borrow to overcome a short-term liquidity problem,” said Partners Wealth Group director, SMSF consulting and auditing, Martin Murden.
Other contravention areas included personal loans to members at 23 per cent and a breach of the in-house asset rules at 20 per cent.
“In-house asset contraventions occur for a couple of reasons. Where a series of loans is made by an SMSF to a related party, often the dollar amount is known but not what this constitutes as a percentage of assets, taking funds over the five per cent threshold,” Mr Murden said.
“Problems can also occur due to superannuation funds having to value their assets at the end of each financial year according to the prevailing market value.
“For example, if your fund previously had $100,000 worth of assets, a five per cent loan would be $5,000. However, should the fund’s value fall to $50,000, $5,000 would in effect translate to 10 per cent.”
While the majority of SMSFs are aware of the five per cent restriction, Mr Murden said some viewed taking loans from the fund as a “cheap and easy source of business finance”.
Despite the reported contraventions, overall the number of SMSFs in breach of the rules has fallen from 11.3 per cent in 2008 to five per cent, the research stated.