Self managed superannuation funds (“SMSF”) have become quite popular investment vehicles in recent years. It is, however, important to remember that they are not a “set and forget” investment, nor are they like other investments or even other trusts such as family discretionary trusts. The superannuation legislation imposes stringent restrictions on what a SMSF can and cannot do, and also requires a much higher degree of record keeping, auditing and reporting than other forms of trusts. It is important that trustees of SMSFs keep on top of these obligations and seek professional support to ensure compliance with them.
A recent example of SMSFs trustees not paying any regard to his obligations, essentially treating the SMSFs as his own (or at least as being a financial resource for his family), and coming spectacularly undone as a result is the case of Hart v Commissioner of Taxation. That case involved a review of a decision by the Commissioner to disqualify Mr Hart from acting as a trustee, investment manager, custodian or officer of a trustee of a superannuation entity. The Commissioner was alerted to the issues by the fund’s auditor issuing a contravention report to the Commission in relation to one aspect of the SMSFs conduct. The list of the contraventions of the superannuation legislation which were alleged by the Commissioner, and upheld by the Administrative Appeals Tribunal, were extensive and included:
- failure to lodge annual tax returns for four years;
- mixing super assets with personal assets;
- transferring a property from related parties in circumstances where it was not permitted;
- transferring the property at less than market value;
- failing to register the property in the name of the trustee;
- transferring the property subject to an existing mortgage;
- making several cash payments to super fund members;
- granting a rent free lease over the property to a related entity;
- a dodgy investment in an overseas company, related to the tax payer;
- providing money to allow a related entity to build a shed on the property;
- the fund ceasing to be a SMSF because it at one stage had five members, when only four are permitted;
- failing to ensure that the SMSF had the sole purpose of providing retirement benefits to members.
The tribunal found that the breaches were established, and the Commissioner’s decision to disqualify Mr Hart was correct. We shudder to think what the tax implications of all this might have been, but it no doubt involved reassessments of tax payable by the fund and by the beneficiaries of it, with significant additional tax, and probably penalties payable.
The lesson to heed from this is that if you have a SMSF, do not treat it like your own money, or even like any other trust, ensure that your accountants are on top of the reporting requirements, and seek advice before you enter into any significant transactions, even if (or perhaps especially if) they are only “in house” transactions with related parties.
For more information, speak with our SMSF legal expert Nigel Hales.