Trustees of Self Managed Super funds (SMSFs) are obligated to organize an audit of their fund each financial year. The auditor’s function is to ensure the trustees have maintained the fund in such as way that it complies with Corporation’s Law, is the trustee is a company, with SIS legislation and taxation laws.

Some of the horror stories clients have shared with us involve non compliant issues that the auditor has identified. This article seeks to illustrate how some simple mistakes can run into costly penalties.

1. Using Super Fund monies for a private purpose

In this story the trustee of the fund grabbed the wrong cheque book when paying an expense for a related entity. The transaction amount was really small about $200.00 but it wasn’t noticed until the auditor asked what it was for. He reported them for not keeping their assets separate from their other entities. The trustee had $600 in penalties to rectify the account.

2. Selling related party assets to the SMSF

While the SMSF can directly buy collectibles like art, precious gems, residential property or even shares in a private company, frequently the trustee will already own these assets and thinking they would be a suitable investment for the SMSF sell the artwork to the Super fund.

This would cause the SMSF to become non compliant as s66 of the SIS Act prohibits a complying superannuation fund from acquiring most assets from related parties of the fund including members and members’ spouse.

3. Allowing the fund to borrow

Some trustees are not aware that overdrawing the bank account by $10 could cause the auditor to report the fund to the regulator as a SMSF is not allowed to borrow unless it strictly follows s67A of the SIS legislation. It also means that the trustee cannot allow the fund to put a “charge” over an asset of the fund.

The new change to this legislation means that a SMSF can now borrow to buy a single asset under trust. While this is a great new opportunity for SMSF trustees care must be taken to ensure it meets with section 67(4A) and that it is a true SMSF loan.

4. Investing in assets in which a relative receives a “current benefit”

The trustees must comply with the sole purpose test set out in SISA s62. Frequently this test is breached when the trust invests in say artwork which they hang on their living room wall. The ATO would consider this is breach of the sole purpose test. 5. Holding greater than 5% in “in-house assets”

An in-house asset is:

• An assets of the fund that is a loan to, or an investment in a “related party of the fund,
• OR An asset of the fund subject to a lease or lease arrangement between the fund and a related party of the fund.

For example the XYZ Pty Ltd Company is trustee of the Blog  Superfund and it buys a residential property and leases it to the member’s son. Firstly it would be an in-house asset by definition and as the market value of the property is greater than 5% of the total assets of the fund the lease to a relative of a member would cause a contravention of the SIS legislation.

6. Not investing according to their written Investment Strategy

Trustees are required to formulate an investment strategy in writing and to invest according to their strategy. The auditor then looks in the minutes which the trustee is required to keep for 10 years to see how an investment is in accordance with the strategy.

A trap for trustees was during the GFC; trustees sold off investments and held the majority of the assets in cash but their investment strategy said 5% of the funds assets would be in cash. The auditor then commented that 95% of the funds assets were actually held in cash.

7. Having Individuals as Trustees instead of a corporate trustee

All members of a fund must be trustees or the trustee must be a company of which all members are directors. Often to save costs at setup members will decide to be trustees in their individual capacity.

This can be false economy as all assets must be held in the name of the trustee as trustee of the SMSF. When new members are admitted to the fund all the assets of the fund must be changed when the new trustees are added.

Can you imagine the difficulties with a large portfolio of shares??

Asset protection is better provided if the fund directly invests in property. A property owned by a SMSF can still cause a problem and the fund is sued. Not being a legal entity the trustee would be held liable as the legal person of the fund. Having a corporate trustee could prevent this effect.