Loans to members and financial assistance continues to be the most commonly reported type of contravention based on ATO statistics.
Speaking in a recent Accurium webinar, SMSF specialist auditor Frank La Spada noted that loans to members and financial assistance continues to be the most commonly reported type of contravention based on ATO statistics.
Mr La Spada said this is also the case for his firm where loans to members account for more than a third of its reported contraventions.
Section 65 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), he reminded practitioners, prohibits trustees from lending money or providing financial assistance to a member of the fund or a relative of a member.
Mr La Spada said it’s important to be aware that where this does occur, it will be an automatic breach of section 65.
One of the key issues is this area, he said, is that some SMSF professionals and trustees don’t have a thorough understanding of what the definition of a relative is in relation to Section 65.
“We see firms that aren’t really across the definition of a relative. The definition is very broad and includes parents, grandparents, brother, sister, uncle, aunt. It doesn’t include cousins.”
Knowledge of the relatives of a member is therefore critical, he said.
“If you’re aware of that, you’re then going to know when the fund is in breach of the Act.”
Understanding the definition of a loan or financial assistance is equally important, he said.
“A loan is an advancement of money and the loan is considered to have occurred at the time the amount is paid,” he noted.
“Financial assistance is using the resources of the SMSF to give any other form of financial assistance. In other words, anything other than lending money.”
Determining exactly what financial assistance is can be more difficult, he noted.
“The problem that we see is that some firms just aren’t aware of the financial assistance occurring in the first place and then the fund will go to audit where it gets queried and the [practitioner is left] a little blindsided.”
Some examples of financial assistance breaches, he said, include giving a gift of an SMSF asset to a member or relative of a member, selling an SMSF asset for less than its market value to a member or relative of a member and purchasing an asset for greater than its market value from a member or relative of a member.
It can also include forgiving a debt owed to the SMSF by a member or relative of a member or releasing a member or relative or a member from a financial obligation owed to the SMSF, including where the amount is not yet due and payable, he added.
“SMSFR 2008/1 is a really important ruling that provides a range of different examples and case studies of what exactly financial assistance is and what is a loan to a member.”
By Miranda Brownlee
06 February 2023