Based on the report of independent SMSF auditors, the Australian Taxation Office (ATO) furnishes a list of major compliance mistakes which SMSF trustees commit each year. It is a befitting exercise for a country that needs stringent regulation to govern about half a million SMSF funds in existence.
Mistake 1# Loans or financial assistance meted out to members
In terms of SMSF compliance, the biggest risk is posed to the ATO by those members who seek to gain an advance access to their superannuation benefits. This, in fact, can have graver repercussions and compromises the security of super benefit at large. As an aside, the compliance breach also breaks the ‘sole purpose’ rule.
The rule, it deserves being mentioned, states that the super fund shall be used for the sole purpose of procuring retirement benefits through it; either for the members or for those dependants who come into inheritance in the event of the premature death of any of the members.
Mistake 2# In-house assets
Sometimes, in a bid to cushion up their individual businesses, members of a super fund make the mistake of holding more than 5% in in-house assets. This is clearly a breach of the 5% threshold for in-house assets.
Mistake 3# Asset separation
How the assets are segregated requires clear documentation. Keeping it unambiguous or open to subjective interpretation is akin to non-complying with the super laws. It is the duty of the SMSF trustees to get each investment registered in the name of their SMSF. Going for the alternate method of registering-say, shares- in the name of corporate trustees or other trustees is a breach of regulation.
Mistake 4# Administrative contravention
Administrative contravention is a crime which SMSF members from different financial hierarchy are culprits of committing. It can be put down to a tendency towards inefficient paperwork. Good news is that it is amongst the most easily rectifiable mistakes.
Mistake 5# Borrowings
SMSF members cannot borrow against collateral of their fund’s assets unless it is a non-recourse loan they are seeking for the purpose of investing in a property. In this regard, my advice to you is to steer clear of gearing mistakes which result from the complexity of regulations and lack of information impartation. To make my point clearer, I will give you an instance where the lender is acting as a holding trustee.
There are many who feel that lenders can save money by standing in as the holding trustee for related party transactions. However, in the event of a person being both the lender to the fund and the bare trustee of the fund, there will definitely creep complications arising from land tax compliance, CGT compliance and Absolute Entitlement.
How long did it take you to rectify your SMSF compliance mistake and was the ATO assisting enough?