When your annual SMSF audit is conducted the independent auditor has a legal obligation to inform the Australian Tax Office (ATO) and the SMSF’s trustee(s) of any contraventions which may result in a very stiff penalty. For the trustee there is often nobody else to blame for compliance issues - not their accountant, financial advisor or specialist administrator. Ultimately, the compliance responsibility rests with the SMSF trustee, regardless of any delegation of duties to third parties. SMSF’s are a powerful investment vehicle, so managing an SMSF requires knowledge and skill if it’s to be driven safely.

Each year the ATO releases a report outlining the top compliance issues made by SMSF trustees. Such a list is vital reading if a trustee is going to know what to look out for in order to recognise the dangers that have caught others out. Here are the biggest no-no’s from the list:

  1. The biggest breach of all is the provision of loans or financial assistance to the fund’s members. These account for a massive 20.9 per cent of contraventions, since contravention reporting began in 2005, up until the financial year ending June 30, 2012. No matter how tempting your retirement savings happen to be, an SMSF can never loan money to one of its members.
  2. Making up 18.3 per cent of breaches is when the fund owns or invests too much in the way of ‘in-house assets’. Such assets (or investments) – for example, at stake in your own business - cannot make up more than 5 per cent of the fund’s value. It’s important to remember that if the value of other assets held in the SMSF fall, or if the value of the in-house assets rises, a previously low percentage of in-house assets could now be over the 5 per cent limit. If that is the case you are in breach of the requirements of the SIS (Superannuation Industry Supervision) legislation.
  3. When the SMSF assets are not clearly separated from personal assets and/or business assets then alarm bells will ring at the ATO, as they did for 12.9 per cent of contraventions in the 11/12 financial year. So don’t muddy the waters by blurring the lines between personal/business and SMSF ownership - make sure SMSF assets are clearly identified.
  4. The ATO refers to the next common mistake as ‘administrative contraventions’ but they really mean ‘shoddy paperwork’.  These account for 12.0 per cent of contraventions. An SMSF does not manage itself, it requires the trustee’s time and attention and this must be reflected in flawless paperwork. Ask a specialist to look after this side of things if that helps - perhaps your accountant. But remember that in the eyes of the ATO the compliance responsibility of the trustee alone.
  5. SMSFs have several compulsory operating standards, such as an independent annual audit, and more recently, a regular review of the fund’s investment strategy. The ATO says 8.3 per cent of contraventions were around such standards not being met. Stay up to date with the changes by seeking professional advice - never assume that your knowledge from last year will keep you in the clear this time around.

Other big issues included:

  • SMSF investments failing the ‘sole purpose test’, meaning members are using their fund to profit now rather than at retirement
  • not investing at arm’s length, or not paying market price for specific assets
  • the fund acquiring prohibited assets from related parties, such as a residential property owned outside of superannuation.

Depending on the nature and number of contraventions, severe penalties can apply. The most severe of which is sometimes referred to as the ‘nuclear strike option’ in which the ATO taxes the entire fund 46.5c in the dollar - a very bad result, indeed. They may also de-register the fund, for non-compliance. Subject to the passing of new legislation currently before parliament, the ATO’s enforcement powers are about to be increased further, with a range of new civil and criminal penalty powers being introduced on 1 July 2013.    

Use this time of year to make sure everything is in order within your SMSF to help guarantee yourself a happy new financial year.