By Solomon Forman, Financial Planner and Accountant
(If you need advice on SMSF strategies , you can contact Solomon.)
There are now over 468,000 Self Managed Superannuation Funds (SMSFs) in
Australia where the members of the fund are also the trustees. These
trustees are responsible for running the fund according to the superannuation
rules. If they get it wrong, the consequences can be dire. Each year, several
SMSFs lose their concessional tax allowance because the trustees recklessly or
persistently ignored the rules.
To reduce this risk, most trustees work with professional advisers to ensure
they legally enjoy the flexibility and control that a SMSF offers.
The superannuation rules aim to ensure that superannuation is for your
retirement and is not used for other purposes or invested recklessly. One
rule bans a fund from giving financial assistance to members of the fund
or their relatives. Whilst this sounds simple, it pays to understand how
the rule works.
Who counts as a relative?
The list of relatives in the rules is long and includes everyone you would
expect including parents, grandparents, children, siblings, uncles and
aunts and nephews and nieces.
The rules also prohibit schemes where financial assistance is provided
to a non-relative who then provides support to a relative. Trying a scheme
like this is asking for trouble because it shows you knew the rules and
were trying to get round them.
What is financial assistance?
Transactions that are banned by the rules include the following:
• Gifts and loans,
• Selling an asset to a member for less than its value,
• Buying an asset from a member for more than its value,
• Buying services that are unnecessary or at inflated prices,
• Providing a guarantee or security using fund assets.
Here are some examples…
1. A SMSF holds works of art and the trustee gives a painting to his
daughter as a birthday present. This obviously breaks the rules. If the
trustee paid market value to the fund for the painting, he could then
legally make the gift.
2. A SMSF owns a workshop that is leased to a business run by a
member of the fund. The business has cash flow problems and misses the
monthly rent payment. No action is taken to recover the debt and the
fund is therefore providing assistance to the member.
3. A SMSF buys a printing machine and leases it to a business run
by the members of the fund. When the lease expires, the business buys
the machine from the fund at market value plus a margin to compensate
the fund for the use of the money. This transaction is effectively a
loan to the members and breaks the financial assistance rules.
4. A SMSF owns a block of land and the trustee sells it to her
son at the market price. The son arranges to pay for the land in
twelve instalments. Apart from exposing the fund to the credit risk
that the son may default on the loan, the transaction breaks the
financial assistance rule.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.