5 Unbreakable Super Fund Rules

Written By Jonathan Robinson – Client Manager

This month we are continuing our theme on Self Managed Superannuation Funds (SMSF), after the article written by director, Tony D’Agostino – Understanding the Tax on Super.

Superannuation funds are powerful tools for building wealth and securing financial stability during retirement and managing these funds comes with strict rules and regulations from the Australian Taxation Office (ATO) to ensure they are used appropriately. Here at Mobility Accounting Solutions, we have five crucial rules of super fund management that you should never break, starting with the often overlooked issue of purchasing assets from a related party.

1. Purchasing Assets from a Related Party

One of the most sensitive areas in superannuation management involves transactions with related parties. These are individuals or entities closely connected to the fund, such as family members or entities owned by the fund’s members or even entities owned by family members.

The legislation is clear that the only time a member can transact with a related party is when it involves business real property or listed securities. You should always consult a professional when actively undergoing any transactions with a related party.

Purchasing assets from a related party can be a mechanism to improperly shift value from the SMSF to a related party or vice versa and The ATO are well aware of this trick.

What is the ATO worried about?

Buying assets from a related party at a discounted or inflated value can be considered a breach of the rules and may result in significant penalties to the SMSF, including:

Reversal or disallowance of the transaction – Yes this actually does happen
Penalties linked to prohibited benefits
Potential tax liabilities on the asset or transaction

These transactions have high risk and high consequences if the Australian Taxation Office take the view that the transaction was not done on an arms length basis and can carry some heavy financial consequences for the members – especially if an investment property is involved, including stamp duty and realising capital gains tax.

And of course, the ATO don’t want members accessing benefits before they retire!

2. Using Assets from an SMSF for Personal Use When Not in Pension

Hanging a painting owned by the SMSF in your office? What about that car you have in the driveway? Living in a house owned by your SMSF? Taking Cash? Don’t! None of this is good!

Allowing personal use of SMSF assets outside of pension phase is deemed as accessing a benefit by the ATO and therefore, qualifies as a breach of the sole purpose test. And these are seen as serious breaches too!

Also, I bet you didn’t know just how strict the ATO can be. Yes, you want to buy that painting, invest in it. Maybe it grows in value, but what strategy do you have? Is it kept in a secure location and not on display? (there are businesses that do this for you!) Is this asset insured and for how much?

I am always intrigued at the level of detail that the ATO can go to when separation between person and SMSF comes into play. Many questions can be raised over the security of the asset. Even as far as showing clear title to the held asset. Which reminds me, can you show clear title of this asset held by the SMSF?

3. Investing in Assets but Not Using the Correct Name (Clear Title)

All assets in an SMSF must be held in the name of the SMSF. Failure to properly title assets in the fund’s name can be considered a breach, affecting the legal ownership and the fund’s compliance status.

But Yes! It makes sense. The SMSF at all times must have an undeniable interest in the asset for it to be compliant and yes, the ATO takes this one seriously too. From insurance documents to invoices to contracts. It all needs to be in the name of the SMSF to avoid any problems.

Incorrect titling can complicate ownership, transactions, and valuation of assets. When this goes wrong the world stops for the SMSF and it can have large consequences.
It is pertinent that trustees review all contracts, invoices and even insurances to ensure the correct name is used.

4. Investing in Illiquid Assets and Not Being Able to Pay a Pension

While SMSFs are permitted to invest in illiquid assets such as property or collectibles the fund must maintain sufficient liquidity to meet its ongoing obligations, including paying a pension if applicable.

Why is this an issue?

If an SMSF invests heavily in illiquid assets and cannot access enough cash when needed, it may be unable to pay pensions or pay creditors. This can breach the trustee’s duty to act in members’ best interests.

The suggestion here is to plan for the future. What pensions are you likely going to be required to pay in the near future? What expenses do you need to pay? Should you really be relying on member contributions to meet these obligations?

An SMSF without sufficient cash reserves constitutes a breach of the SIS act and can even put the trustees in a tight spot, such as needing to sell an investment property or requiring the sale of good performing assets.

5. Conducting Business as an SMSF

Last but not least – business activity. SMSFs are designed solely for superannuation purposes and are not permitted to operate as a business entity or engage in commercial activities beyond the scope of investment management. Conducting a business through an SMSF is a fundamental breach of what SMSFs are designed to accomplish and as such the ATO does not take this lightly.

Be sure to avoid operations that go beyond passive investment and never engage in enterprise activities that are primarily for profit.

To avoid any doubt:

Stick to the basics and utilise your SMSF for passive investments
Avoid entering into contracts or agreements that suggest running a business.

In conclusion, managing a superannuation fund, particularly an SMSF, involves strict adherence to rules designed to protect members’ retirement savings and prohibit tax avoidance. The ATO really are there to make sure we are all using SMSFs for their intended purpose – setting us up for retirement.

The attractive and lower tax rates are an incentive for taxpayers to game the system, but in fact, the intended purpose of the lower tax rates is to reduce the burden on the social security system as the years go on. The five rules of super fund management you should not break serve as a critical reminder to stay compliant and safeguard your retirement strategy. Avoiding these mishaps can reduce the risk of mishaps and serious consequences.

Should you require further information in relation to SMSF issues you are always welcome to contact us here at Mobility – call +61 7 3666 0091.

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