Spotlight on SMSF Compliance

Date Added: 01/06/2012 by Juris Stega - Baker Affleck Moffrey

The compliance focus by the Australian Taxation Office (ATO) on self managed superannuation funds has continued into the new year.

On 30 January 2012, the Administrative Appeals Tribunal (AAT) heard an appeal against the Commissioner’s decision to issue a notice of non-compliance to the Trustee of a self managed superannuation fund (The Trustee for the R Ali Superannuation Fund and the Commissioner of Taxation {2012} AATA 44).

During the 2005 to 2008 financial years the Trustee of the fund lent money to a related company controlled by the Trustee.  The related company then lent money to members of the fund.  The action by the Trustee caused the fund to breach superannuation law in that it lent money or gave financial assistance to a member of the fund.

The loans were subsequently repaid to the fund and the Trustee contended that the Commissioner should have exercised a discretion and treated the fund as compliant.

Given the seriousness of the breaches by the fund, the AAT affirmed the decision of the Commissioner to make the fund non-compliant. 

Non-compliance means that the fund is taxed at 45% on its income.  Furthermore, in the first year of non-compliance the fund is also taxed at 45% on the value of its assets (less non-concessional contributions) as at the start of that year.

Given the ATO’s continued focus on self managed superannuation funds Trustees should exercise diligence in the administration of such funds.

Issues to which Trustees should pay particular attention to include:

• Loans to related parties and trusts – financial distress is not an excuse for the fund to lend money to a related party;

• Related party dealings – all dealings with related parties must be on an arm’s length or commercial basis supported by third party evidence;

• In house asset cap – the market value ratio of a fund’s in house assets cannot exceed 5%.  This applies to loans to, or investments in a related party, or an asset of the fund subject to a lease with a related party;

• Borrowings from a related party – non-recourse loans from a related party must be maintained on commercial terms as if they were loans from an unrelated financier;

• Contributions – ensure that the concessional cap of $25,000 ($50,000 for members over the age of 50) and the non-concessional cap of $150,000 (or $450,000 under the two year bring forward rule) are not exceeded.  Members aged between 65 and 75 can only contribute if they pass the work test (employed for at least 40 hours in a 30 day period).  Self employed persons can only claim a deduction for personal contributions if less than 10% of their income comes from employee activities;

• Pension payments – ensure that minimum payments, as specified by regulations, are made to members in receipt of pensions, by 30 June 2012  ;

• Succession planning – ensure that Binding Death Benefit Nominations are in place and have not expired.  Consider Death Benefit Agreements which do not expire;

• Update deeds – older deeds should be updated to take into account changes in superannuation law;

• Resolutions – always record significant trustee decisions in the form of a written resolution.

Attention to the above issues will assist the fund to maintain its complying status and benefit from the tax advantaged environment afforded to self managed superannuation funds.

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