If you’re a trustee of one of the approximately 577,000 SMSFs in Australia at the moment, there are some areas the Australian Tax Office wants you to pay particular attention to – including the sole-purpose test, the in-house asset rules, unlawful schemes and arrangements, and dividend-stripping. If it all seems a bit confusing or you’re unsure about anything, we can help you get it right.
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 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 and in a bid to make SMSF trustees more aware of their obligations, the ATO has shared some insights into the common areas that cause concern.
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 a SMSF’s in-house assets cannot exceed 5% of their total assets. Put simply, an in-house asset includes:
- a loan to, or investment in, a related party of the fund;
- an investment in a related trust of the fund;
- 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
While the ATO only sees a small number of cases where SMSF trustees are targeted in the promotion of unlawful schemes and arrangements, the consequences for SMSF trustees and their funds are very serious. If you or your fund gets approached with promises of significant tax or financial benefits beyond what is ordinarily available, remember, if it’s too good to be true, it probably is.
Recently, the ATO has also 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incorrectly promotes that individuals can roll their retirement savings out of APRA-regulated funds into SMSFs to be withdrawn as a deposit on a house.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.
To date this financial year, the ATO has disqualified 214 trustees, the majority related to illegal early release of funds and loans to members.
Over the past 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 the 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.
Investment Strategy and Insurance Review
A SMSF must have a documented investment strategy that outlines your intentions of how you plan to allocate the monies in the fund to various investments in order to derive an investment return, protect the assets and create an income stream at retirement. This investment strategy must be reviewed regularly to ensure it continues to reflect the purpose and circumstances of your fund and its members (your review and any decisions made should also be documented).
As part of this investment strategy, and as a legislated requirement, trustees are required to consider whether to hold insurance cover for each member of the SMSF.
Doing everything yourself might save you some money, but the decisions you make around your SMSF is especially important for your future and retirement. If you’re unsure about a new investment, considering making additional contributions, or looking to start paying benefits from your fund, our SMSF specialist advisors can help you get it right.