Common SMSF mistakes and how to avoid them

Running your own Self Managed Superannuation Fund (SMSF) can be time-consuming, but keeping on top of your obligations is essential to protect your retirement savings. While many people enjoy the control an SMSF offers, the Australian Taxation Office (ATO) maintains strict oversight. Even with the introduction of potential three-yearly audit cycles for well-managed funds, it’s vital to stay vigilant. The ATO closely monitors the sector, and most compliance breaches are easy to rectify if you have up-to-date information and the right professional support.

Here are some common SMSF mistakes to watch out for.

Dipping into fund money or assets

At the heart of SMSF compliance is what is known as the sole purpose test. This means all activities of your SMSF must be for the sole purpose of providing retirement income to fund members or death benefits to their dependents.

A common misunderstanding among small business owners is treating their SMSF like a personal bank account they can dip into when their business hits a tough patch. Some trustees may also be tempted to help family members with a loan or gift of fund money. The rules are clear: the early release of money or assets to fund members or their relatives is illegal and can lead to severe penalties.

Limits on in-house assets

An in-house asset is where a fund owns an interest in an investment held by one or more of the SMSF members, their relatives, or related entities. Examples include:

• Shares in a private company controlled by a member.

• A house owned by the fund that is leased to a member’s adult child.

• A loan to a partnership where members are the partners.

The ATO also keeps a close eye on artificial arrangements involving SMSFs and related-party property development ventures. The rules stipulate that a maximum of 5% of an SMSF’s assets can be allocated to in-house assets. You need ongoing monitoring of your portfolio to avoid unintentional breaches of this cap.

Separation of assets

Fund assets must be kept strictly separate from your personal and business assets.

Unfortunately, if your fund invests in collectibles such as art or wine, hanging the fund’s artwork in your home or drinking a bottle of wine owned by the fund would breach the sole purpose test.

You would also breach the rules if you bought an investment, such as shares, with fund money but registered them in your own name, even if it was purely accidental.

Records and reporting

To stay on the right side of the rules, you need to have a separate bank account for fund money. You should also document all investment decisions, transactions, and ownership.

Record-keeping is more important than ever because SMSFs must report events that affect transfer balance caps to the ATO. For most funds, this is an annual duty, but some funds with members in the retirement phase may be required to report events affecting transfer balance caps quarterly. Furthermore, all funds must be audited by a professional SMSF auditor each financial year. Your auditor is required to advise both you and the ATO of any breaches of the rules.

The cost of transgression

The ATO generally gives trustees a chance to rectify mistakes, but substantial administrative penalties can be levied for serious breaches such as loans to members. SMSFs offer opportunities that aren't possible with mainstream superannuation funds. They allow you to be more hands-on and utilise strategies such as direct investment in property or the purchase of business assets. However, you must comply with the rules to ensure those benefits aren't lost.

Partner with a local SMSF professional

If you’d like to know more, or if you need to review your current setup to ensure it remains compliant, please contact our friendly team.

Contact us today.

---

General advice warning: The advice provided is general advice only. In preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Liability limited by a scheme approved under Professional Standards Legislation. Any taxation and accounting services are provided by Venture SMSF Services and are not within the authority of Count Financial Limited’s (“Count”) Australian Financial Services Licence number 227232.