In a recent update, the ATO said while there may be good reasons why a member of an SMSF has a nil account balance recorded on 30 June of an income year, it may indicate issues with the fund’s administration.
The ATO noted that a member of an SMSF may have nil account balance where the fund is newly established or the member was added to the fund just before the end of the income year.
“However, in some cases a nil account balance may indicate your SMSF has not been administered correctly especially if your fund has only one member, or there are no contributions, rollovers or transfers recorded for a member over several years,” the ATO cautioned.
If a member in the SMSF has a nil balance account, the ATO said it is important that SMSF trustees ensure the fund has been set up correctly, that the member intends to contribute to the fund in the future and that the fund is complying with the super and tax laws.
The ATO stated that even where there are genuine reasons for a nil account balance, a member who is also a trustee (or director of a corporate trustee) of the SMSF is still responsible for running the fund and making sure the super and tax laws are complied with.
Newly established funds
In order to legally establish an SMSF, the ATO outlined that the fund needs to have assets set aside for the benefit of members.
“Even if a nominal amount is used to establish the fund until a rollover, transfer or contribution is made, the amount is regarded as a contribution and needs to be allocated to a member.”
“Therefore, there should always be at least one member showing an account balance of greater than zero in the fund’s first year of operation (and later income years).”
The ATO reminded trustees that they cannot lodge an SMSF annual return for a fund with no assets or no closing member balances, unless it is for the income year in which the fund is wound up.
Issues with the set up of the fund
If a member has a nil account balance and there are no contributions or rollovers recorded for a member, particularly over several years, the ATO warned that this may indicate that the fund has not been set up and structured correctly.
“The fund may not meet the requirements to be an SMSF under the super laws. For example, a trustee (or director of a corporate trustee) may be incorrectly included, or recorded, as a member of the fund (in cases where your fund has more than one member),” the ATO said.
Limited recourse borrowing arrangements
A nil balance may also arise in situations where an SMSF trustee has entered an LRBA where the loan balance exceeds the value of the asset acquired under the LRBA because of a decrease in the asset’s value.
Reporting a nil balance
The ATO said nil account balances need to be reported a certain way when lodging the SMSF annual return.
If a member has a nil opening or closing account balance for an income year, this is reported as “zero” on the SMSF annual return, it said.
ATO is pretty abysmal with their stance on nil balance! Setting up fund involves several things which can take time before money starts to come into the fund’s account.
In some cases hold up may be due to the fact that member(s) may have outstanding tax obligations which prevent the fund from being compliant
In some cases the ATO are very petty with nil bank balance statement which is obviously an evidence that we are working on to get money to start coming into the fund. They do reject requests for nil return because they want to see when the money start to come into the fund but not evidence of nil balance as at 30 June 20XX as required by the ATO website. I have had more than 5 SMSF rejected by the ATO in the last minute at the end of February despite my submission at least 2 months earlier!