Financial assistance to SMSF members or their relatives is not limited to providing cash from the fund, but can include transferring ownership of any asset without payment, yet these situations can be rectified by applying stiff loan terms to make good the repayments.
Cooper Partners Financial Services director Jemma Sanderson said financial assistance was a breach of section 65 of the Superannuation Industry (Supervision) (SIS) Act and often led to other breaches as well from the same set of actions.
“Financial assistance, where money is loaned out of the fund to members or relatives of members, is a direct breach and it would be the first breach because it would also be classified as an in-house asset breach, since it’s a loan to or an investment in a related party,” Sanderson said during a recent presentation hosted by The Auditors Institute.
“Financial assistance to members could also include the payment out of an asset or the transfer of shares from the super fund to the member personally where they haven’t paid for them.
“Those are interactions with a related party and are actually in-specie transfers and it can even take place with property.
“I have seen where members have a residential property in the fund they are leasing to their children, and when noting it’s a breach of the in-house assets test, they dispose of it and the property gets transferred out of the fund to the member.”
She said given these breaches of section 65 are viewed as informal loans, the best way to rectify them is to recognise the loans and charge the appropriate level of interest on those assets.
“The rate of interest you apply [as an advice practitioner] is to make a professional judgment call. Often we use the practical compliance guideline rate, which is 8.85 per cent at the moment, sometimes it’s the Division 7A rate, or perhaps an external rate, as long as it’s a reasonable rate to use,” she said.
“Generally, the consideration is that since the SMSF hasn’t got a formal loan agreement in place, or it has not taken security over the relevant assets, we will be talking about a higher rate.
“If we treat it as a loan, charge interest on it and have the related party pay back the loan in cash with interest charged, despite the fact there are breaches in various areas, from our discussions with the ATO, then we generally see no further outcome.
“The preference with all of these is that any of those rectifications occur before the fund gets audited so the auditor can see there has been a breach, but will state in the auditor contravention report they have since been rectified.”