An improvement in two major troublesome compliance areas has been reflected in recent SMSF research performed by financial services firm Partners Wealth Group.
The study found the proportion of compliance breaches involving loans made to members from SMSFs fell from 38 per cent in 2013 to 23 per cent in 2014.
In addition, the research showed 20 per cent of SMSFs breached the in-house assets rule in 2014, down from 31 per cent in the previous year.
Partners Wealth Group SMSF consulting and auditing director Martin Murden said while breaches stemming from loans to members could easily result from genuine errors, it did not make them any less serious.
“Periodically loans occur by mistake, for example, using the wrong chequebook, that of the SMSF, to pay a personal expense. On other occasions members are simply in need of money and there is no one to stop them from borrowing from the fund,” Murden said.
“However, it is important to remember that while the loan may appear small in dollar terms and when compared to overall fund assets, personal loans are simply not allowed under super legislation. They’re an absolute no-no and size is no excuse.”
He also pointed out that although there was a drop in the number of funds falling foul of the in-house assets rule, the issue was still a major concern for the sector.
“In-house asset contraventions occur for a couple of reasons. Where a series of loans is made by a SMSF to a related party, often the dollar amount is known, but not what this constitutes as a percentage of assets, taking funds over the 5 per cent threshold,” he said.
“Problems can also occur due to superannuation funds having to value their assets at the end of each financial year according to the prevailing market value.
“For example, if your fund previously had $100,000 worth of assets, a 5 per cent loan would be $5000. However, should the fund’s value fall to $50,000, $5000 would in effect translate to 10 per cent.”
On a more worrying note, the study showed contraventions involving limited recourse borrowing arrangements (LRBA) rose from 12 per cent in 2013 to 23 per cent in 2014.
Murden put that result down to the ability to use gearing in an SMSF as still being a relatively recent development.
“Because borrowing via a LRBA is relatively new and has been subjected to several rule changes since inception, my suspicion is that there has been confusion, resulting in some SMSF trustees thinking it was permissible to use their fund to borrow to overcome a short-term liquidity problem – much like a small business seeking a temporary extension to a bank overdraft in difficult circumstances,” he said.
Overall, Partners Wealth Group found the percentage of funds that had broken the rules governing SMSFs had more than halved over a seven-year period, with only 5 per cent in breach of the legislation in 2014, down from 11.3 per cent in 2008.
Murden attributed that result to the larger amount of retirement savings held in SMSFs, which was providing a greater incentive to improve compliance, as well as the severity of the new ATO penalty regime, allowing the regulator to fine each trustee up to $10,200 for legal infringements.
Partners Wealth Group compiled its research findings from information pertaining to over 600 SMSFs.
