SMSF trustees paying fund expenses and being reimbursed may be able to sidestep claims it was a non-arm’s-length transaction, but are likely to breach other rules related to the operation of the retirement savings vehicle, according to an SMSF audit expert.
ASF Audits head of technical Shelley Banton said it was common practice in the past for a trustee to purchase an asset, such as property, for their SMSF by paying the deposit personally and then claiming that as a contribution, but the ATO is now discouraging this behaviour.
Speaking during a recent webinar, Banton added the regulator no longer considered paying a deposit would be counted as a contribution and this course of action may trigger non-arm’s-length income (NALI).
“What the ATO are saying is that the fund is paying less than the contract price because it may only be forking out $900,000, for example, when the price should actually be $1 million,” she said.
“The other $100,000 has been paid by the member personally and not the fund so technically it hasn’t been purchased at market value and triggers the NALI provisions.”
She pointed out even if the SMSF reimbursed the trustee, the ATO would want to know about the arrangement and the auditor should report it.
“This would probably avoid the NALI issue, but you’ve triggered another issue where the fund is lending money, so there would be a breach of that rule considering the amount was over $100,000,” she added.
“It’s a situation where you’re trying to rectify the problem, but created another compliance breach as well, and even though it would show as being rectified, it would have to be reported to the ATO in an auditor contravention report (ACR) at the end of the financial year.
“How the ATO would look at that will be up to how they’re going to risk rate that ACR, whether the trustee had other issues with the fund and it would also depend on the time frame in which it was paid back.
“It would be all of those facts and circumstances that would be taken into account by the ATO to see where they land on getting back to the trustee and whether there’ll be any penalties involved with that.”
