SMSFs can be a great investment vehicle for those prepared to get the compliance side of things right. The ATO takes SMSF regulation seriously and has now revealed the top three contraventions it sees among SMSFs. This is a helpful insight into the areas that are frequently tripping up SMSF trustees.
The ATO says it will work with cooperative trustees to help them rectify breaches and get their fund back on track. But even with the best intentions, fixing these problems can be expensive, time-consuming and stressful. Our handy breakdown of the top three compliance traps will help you avoid these headaches.
- Loans or financial assistance to members (21.1%): SMSFs may not lend money, or provide other “financial assistance”, to a member of the fund or a relative of a member. This sounds like a simple enough rule, but it’s not just loans of money (both documented and undocumented) that fall foul of this restriction; scenarios such as selling an asset to a member or relative below market value, and paying for services performed by a member or relative in excess of what the SMSF requires are just some examples of this breach.
- In-house assets (18.7%): The in-house asset (IHA) rules limit the amount that SMSFs can invest in arrangements controlled by related parties. There are three types of IHAs: a loan to a related entity (eg a loan to the members’ family trust); an investment in a related company or trust (eg buying shares or units in a company or unit trust that the members or their associates control); and an asset of the fund (other than commercial property) leased to a related entity. SMSFs are not permitted to hold IHAs worth more than 5% of the fund’s assets.
- Failure to keep personal assets separate from the SMSF (12.8%): SMSF trustees must keep the fund’s money and assets separate from those the trustees own personally. This means cash should be kept in a separate bank account in the fund’s name, and the fund’s ownership of assets (eg property and shares) must be carefully registered.
Proactive planning is the best way to ensure your SMSF investments are compliant and you stay off the ATO’s radar. Contact us for expert assistance with your SMSF’s proposed investments.