Another Telling Reminder For SMSF Trustees

Every so often, self-managed super cases before the Federal Court provide telling reminders for SMSF trustees about some of the most fundamental rules in superannuation.

The court gave its judgment during September in the latest of such cases. No doubt, a number of SMSF advisers will draw their clients’ attention to the judge’s findings.

The husband-and-wife trustees of an SMSF were personally fined $20,000 each in civil penalties for breaching the most basic rules in super.

Over a three-year period, the trustees arranged for their fund to make 68 "loans" and other payments totalling $209,677 to pay their personal expenses. These expenses included the servicing a line-of-credit debt remaining after the sale an unsuccessful business.

The "loans" were unsecured and no provision was made for the payment of interest.

As the judgment noted, the withdrawals "almost exhausted" the SMSF’s assets. By June 2015, the fund had little more than $6,000 in assets.

It is worthwhile running briefly through the breaches in this case of basic superannuation law. The trustees contravened the:

Sole-purpose test: A super fund must be maintained for the purpose of providing retirement benefits to members.
Prohibition on loans to members: Super funds must not give financial assistance to members or their relatives.
In-house asset rules: With certain exceptions, SMSFs are not allowed make loans, provide leases or have investments with related parties and entities that exceed 5 per cent of its total asset value. (Significantly, there is no exemption under the in-house rule to the bar on providing financial assistance to members.)
Arm’s length requirement: A fund is required to make investments on an arm’s length, commercial basis.

SMSF trustees who breach such fundamental laws of super are not only risking hefty penalties but are putting their retirement savings in extreme jeopardy. In other words, they are often only hurting themselves.

Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia.

As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider yours and your clients’ circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This website was prepared in good faith and we accept no liability for any errors or omissions