Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

3 common SMSF breaches and how to avoid them

Morningstar  |  23 May 2018Text size  Decrease  Increase  |  
Email to Friend

Self-managed superannuation funds (SMSFs) now account for the management of almost one-third of all superannuation in Australia. They have become popular with many Australians over the last decade as an SMSF enables one to use their super towards additional strategies such as purchasing an investment property, taking more control of your superannuation or enable you to purchase some business assets. Strategies that may not be possible with traditional industry or retail superannuation funds.

The ATO reports every year a summary of all the breaches SMSFs make. A breach is where the Trustees of an SMSF have done something that contravenes the superannuation rules. Around 2 per cent of all SMSFs report a breach each year. Thankfully, half of these funds have rectified the breach before the financial year is over.

Here are a few tips to help you ensure your SMSF is always compliant, as told to Morningstar by Omniwealth financial planner, Andrew Zbik.

The buck stops with you

Even if you engage the services of an accountant or a financial planner, as Trustee of your own SMSF, the buck stops with you. It is the responsibility of the Trustees to ensure the fund acts within the rules and laws of the superannuation system.

The easiest test I share with clients is the "sole purpose test". This test states that all the investment activities of the SMSF must be for the sole purpose of generating capital growth and income return to support the provision of an account based pension at retirement.

For example, if your SMSF purchases an investment property and leases the property to an unrelated tenant at markets rates – the SMSF meets the sole purpose test. However, if the SMSF purchases an investment property and anyone who is a member of the fund or deemed to be a related party of a member of the fund uses that property the sole purpose test is breached.

This includes any siblings, children, or blood or marital relatives of an SMSF member as well as any business associates. The reasons are a benefit other than providing for a pension is being received by a related person to the fund – i.e. the enjoyment of the property.

Keep good records

Another common breach made by SMSFs is in an area called in-house assets. An in-house asset is where a fund may partially own an interest in an investment that is also owned by one of the members of the SMSF. For example, shares in a private company.

There are limits of how much of the SMSFs assets can be allocated to in-house assets – a maximum of 5 per cent. This is one of the most common types of breaches. Without good record keeping of the fund’s investment activities and the decisions made by the Trustees, breaches around areas such as in-house assets become common.

I always ensure we have accurate notes that summarise any conversation or meeting with have with clients so that we always have a record of our decisions and the position of the SMSF. With new continuous reporting obligations set by the ATO, if your accountant is not moving your SMSF to a monthly reporting basis its time to get a new accountant.

Additionally, I always pre-schedule my next review with clients six-months in advance. This way we are always on top of the financial position of the SMSF.

Don’t be cute

SMSF rules and regulations are not something to be pushed. Sometimes clients will ask me to push the boundaries with what an SMSF can do.

Another common breach by SMSFs is that they lend money to their members. A BIG NO NO! After reminding clients that the consequences of being rendered a non-complying fund is that 45 per cent of the gross value of the fund’s assets will be paid to the ATO – seems to always stop any attempts to push the boundaries.

Ultimately, if you ever have any ideas about making a new investment decision in your SMSF ask your Adviser first. Thanks to the diligence of my clients asking first I have stopped many bad investment ideas before they were made.

More from Morningstar

• Why Telstra will maintain industry dominance

• AustralianSuper tops performance league tables

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend