Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
Understanding super & money
By Scott Quinn, Technical Services Manager
In 2020/21, auditor contravention reports (ACRs) were lodged for 13,900 SMSFs reporting 40,200 contraventions.
The same three contraventions:
continue to top the contraventions list, contributing 50% of all SMSF contraventions.
An SMSF is prohibited from lending money or providing financial assistance to a member of the fund, or a relative of a member. Similarly, an SMSF cannot provide a loan or financial assistance through another entity to circumvent this restriction.
A relative of a member includes a member and their spouse’s:
An SMSF cannot lend money to a member of the fund or a relative of a member.
An SMSF can lend money to:
The loan would have to form part of the SMSF’s investment strategy and be an authorised investment under the trust deed.
There is a common misconception that an SMSF can lend up to 5% of fund assets to members or a relative of a member. An SMSF can lend up to 5% of fund assets to a related party, provided that the related party is not a member or a relative of a member.
If an SMSF lends money to a member, it generally constitutes illegal early access. Penalties may apply (refer to ‘Penalties for breaching SMSF rules’) and the amount is included in the recipient’s assessable income.
An SMSF cannot provide financial assistance to a member of the fund or a relative of a member.
Financial assistance includes:
In-house assets are generally investments in, loans to or fund assets leased to related parties and are limited to 5% or less of the market value of the fund’s total assets. SMSFs can acquire an in-house asset provided the acquisition is at market value and the asset acquired does not result in the fund exceeding the 5% limit.
Common related parties include a member of the fund, a spouse of a member, relatives of the member and their spouses and a controlled private trust or company.
Certain assets are exempt from being an in-house asset and include:
In-house assets are limited to 5% or less of the market value of the fund’s total assets. This is tested at the time an in-house asset is acquired or established and each 30 June.
An in-house asset cannot be acquired or established if it will result in a breach of the 5% in-house asset limit. If the market value ratio of the fund’s in-house assets at the end of the financial year exceeds the 5% limit, the trustees of the fund must prepare and implement a written plan before the end of the next financial year. The plan must specify the excess amount and set out the steps to be taken by the trustee to dispose of one or more in-house assets with a sufficient market value to ensure the in-house asset level is reduced to below the 5% limit.
If the market value of the fund’s in-house assets falls below the 5% limit before the trustees have implemented their plan to dispose of an asset and the trustees subsequently did not dispose of the asset as planned (prior to the next 30 June), they would still be considered to have rectified the issue as the in-house asset level is below the 5% limit.
Assets of the SMSF must be held separately from the member’s personal and business assets. Sale agreements should be executed and assets held in the name of either:
Where an asset of the fund cannot be held in this naming convention (eg due to state law), ownership by the SMSF can be clearly established by executing a caveat, or creating an instrument or declaration of trust.
The surest way to achieve separation of assets is to use a corporate trustee with the sole purpose of acting as trustee for the SMSF. Any changes in membership of the fund / directors of the corporate trustee won’t require ownership documents to change as the assets will be held the name of the corporate trustee ‘as trustee’ for the SMSF.
Multi purpose trustee companies may have difficulties with clear delineation of what is an SMSF asset and could put the funds assets at risk (eg in the event of death, relationship breakdown and insolvency or bankruptcy).
With individual trustees, there is a greater risk that SMSF assets won’t be clearly delineated from personal assets. SMSF assets must be clearly owned by the individual trustees ‘as trustees for’ the SMSF. If a member joins or leaves the SMSF this will require a change in trustees and an update to all ownership documents for each asset of the SMSF (the ownership change should be included in the SMSF records along with clear evidence to support the fund’s ownership of the asset).
The following table outlines the courses of action available to the ATO to deal with SMSF non-compliance.
If an SMSF trustee is unsure whether a transaction or arrangement will breach the rules, the trustee could consult their SMSF specialist adviser, their SMSF auditor, apply for an SMSF specific advice or apply for an ATO private binding ruling prior to implementing the arrangement. Checking the arrangement upfront will significantly reduce the risk of a contravention and may provide certain benefits or protection.
An SMSF auditor is responsible for ensuring that the SMSF complies with super rules. They are responsible for identifying and reporting any contraventions to the ATO.
An SMSF specific advice service is provided by the ATO and outlines how super law applies to a particular SMSF transaction or arrangement. SMSF specific advice can be provided for:
SMSF specific advice cannot relate to the complying status of an SMSF, trustee covenants or the residency status of an SMSF.
However, SMSF specific advice is not binding on the ATO. If the ATO later determines that the law applies less favourably, where all relevant facts were fully disclosed by the SMSF, acting in accordance with the SMSF specific advice would be looked at favourably by the ATO when deciding what compliance action, if any, will be applied.
A private binding ruling is provided by the ATO and outlines how tax law applies to a particular SMSF transaction or arrangement. For example, you would apply for a private binding ruling for the residency status of your SMSF. A private binding ruling is binding on the ATO. If the private ruling is later found to be incorrect, the ATO can only apply the law correctly if this will provide a more favourable outcome for the SMSF.
The ATO aims to provide an SMSF specific advice or private binding ruling within 28 days, complex matters may take longer. Consider sufficient lead time for any transaction or arrangement subject to time pressure.
Consistently, the same three contraventions contribute to 50% of all SMSF contraventions. Understanding restrictions on providing loans or financial assistance to members, in-house assets and the requirement to keep SMSF assets separate will go a long way from keeping an SMSF from being a statistic.
If in doubt as to whether a particular transaction or arrangement contravenes the law, seek appropriate guidance prior to implementation. It reduces the risk of a contravention and may provide certain benefits or protection.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.