Trustees are responsible for administering a self managed fund, even when they pay for advice from an accountant or licensed financial adviser.
This case study shows how Bob did not follow the rules.
Bob set up two self managed super funds. The funds were set up with less than $20,000 each.
Bob didn't comply with the following parts of the super laws, particularly:
- keep accounting records
- prepare accounts and statements
- appoint an auditor to get an audit completed on the fund for each year, and
- lodge returns.
Bob said that preparing the documentation was not necessary and that getting an audit done would cost too much considering the amount of money he had in the fund.
He refused to comply with his obligations as a trustee and the fund was made non-complying. This means Bob lost his concessional tax treatment, and everything in his fund was taxed at the highest marginal rate.
If Bob had considered the administrative obligations and costs required to run a self managed super fund in the first place, or had spoken to a professional about it (taking his own circumstances into account) he might have discovered that a SMSF just wasn't for him.
Paul and Michael attended a seminar. The speaker at the seminar said that their fund could enter into a joint venture.
Paul and Michael believed that this would be a good investment for the fund and they went ahead with this and started a related trust.
The fund provided all the capital for the venture which involved a property development.
The fund was entitled to receive a small portion of the rent and a portion of the proceeds on the sale of the property. The fund did not have to pay any expenses in relation to the land and had no responsibility for management of the venture. The fund also had no ownership interest in the property.
Essentially, the fund had invested in the related trust in contravention of the in-house asset rules.
As a result, Michael and Paul had to enter into an enforceable undertaking to dispose of the investment in the venture.
Making a fund non-complying is something we never take lightly. A fund that has been made non-complying can suffer serious tax consequences. The fund's total assets (less the sum of the part of the crystallised undeducted contributions that relates to the period after 30 June 1983 and the contributions segment for current members at that time so far as they have not been, and cannot be, deducted) are subject to tax at the highest marginal rate. In addition, any income in a year in which a fund is non-complying is taxed at the highest marginal rate.
Generally, we will look at all other avenues first, as this case study shows.
Nathan used money from his fund to build a residence for the members to live in; breaching the sole purpose test. Nathan and the other trustees built the residence on land not owned by the fund.
Also, the trustees assisted a related company when that company was in financial hardship. The trustees didn't make sure the loan was made or maintained on an arm's length basis.
According to the super laws, a loan of up to 5% of the assets of the fund is allowed, however, the loan exceeded 60% of the fund's assets. There was no documentation and the loan was not on commercial terms.
The trustees entered into an enforceable undertaking to rectify the contraventions and to ensure the fund was compensated for the loss of income for the period of time the money was not in the fund.
After agreeing to the undertaking, the trustees did not respond to any further correspondence from us and did not prove that they had complied with the undertaking.
After some time, the trustees rectified some of the contraventions but made no attempt to rectify the remaining breaches and the fund was made non-complying.
Superannuation is meant for your retirement. Accessing your superannuation before meeting a condition of release (like retirement) is against the law.
In a recently-decided Federal Court case, a Queensland couple incurred civil penalties of $30,000 and an order to pay $32,500 in costs.
The couple accessed funds in their self managed super fund to pay off a personal debt of a member. In total, the members accessed almost $150,000 (the total of the fund's assets) and the majority of the funds ($130,000) were made to the liquidator of an associated private company of which one member was a debtor.
The trustees originally pleaded that they had placed reasonable reliance upon advice from various professionals. In the light of contrary evidence, the trustees did not continue with this particular defence.
The case also highlighted the importance, where a corporate trustee is involved, to ensure that title to fund real property is correctly recorded and that separate bank accounts are used if the trustee has other activities.
Finally, the judge observed that persons taking advantage of the existence of self managed super funds must act in accordance with the legislation.
Last Modified: Thursday, 4 September 2008