Are you the trustee of one of the approximately 577,000 SMSFs in Australia at the moment? As the SMSF sector continues to grow and the number of funds continue to increase, the workload of the ATO as the regulator increases. Instead of the rigid enforcement of the rules, the ATO has taken an educational and early engagement approach with the SMSF sector. As a part of that early engagement, it has shared some insights into the common areas that cause concern in a bid to make trustees more aware.
The sole-purpose test
The test requires that the SMSF maintains investments for the sole purpose of providing for retirement and death benefits to members. If you’re using SMSF assets to provide residential accommodation to a member or a relative, the ATO considers that to be a contravention of the sole-purpose test. This is the case even if the fund receives arm’s length rent.
In-house asset rules
The rule requires that an SMSF’s in-house assets cannot exceed 5% of their total assets. In-house assets include: loan to, or investment in, a related party of the fund; investment in a related trust of the fund; or an asset of the fund subject to a lease or lease arrangement with a related party of the fund.
The most common regulatory breach seen by the ATO in relation to in-house assets relate to the lending money or assets to members or relatives of members of the SMSF.
Unlawful schemes and arrangements
Recently, the ATO has seen an arrangement which incorrectly promotes that individuals can roll their retirement savings out of APRA-regulated funds into SMSFs to be withdrawn as a deposit on a house. It warns that these arrangements are illegal and that you could lose all your retirement savings and be subject to enforcement action for breaching the superannuation rules. Remember, if it’s too good to be true, it probably is.
In the last 24 months, the ATO has seen quite a number of dividend-stripping cases involving SMSFs. Dividend-stripping in its classic form involves the acquisition of controlling shares in a company that has a considerable balance in its profit and loss account and corresponding liquid assets, the acquiring entity arranges for the company to declare a large dividend then sells the shares. These arrangements are typically used to move large amounts of money into SMSFs to get concessional tax benefits.
As a result of ATO’s investigations, there have been cases where the trustee has been removed, and also those that have agreed to roll their assets into APRA-regulated funds. Trustees were also required to repay franking credits and forego the benefit of future franking credits. If you need to make some decisions about your SMSF and you need some support, we’re here to help.