As some of our clients would be aware, we can ask many questions about certain transactions. When it comes to super, it is all about the detail.
We do this not to be painful, or to create more work for you as trustee, but to ensure the compliance of your Self Managed Superannuation Fund (SMSF) is maintained at the highest standard possible. To protect both you and your retirement savings from the regulator.
In a recent case heard by the Administrative Appeals Tribunal of Australia (AAT), it has upheld the disqualification of a director of a trustee of an SMSF in Fitzmaurice and Commissioner of Taxation (Taxation)  AATA 2217.
Central to the disqualification were the failure to keep good records, explain transactions adequately, and conduct related party dealings on commercial terms. All could have been avoided with better documentation and attention to detail.
There were two main circumstances for which the breaches related.
1. Money withdrawn from the SMSF for expenses after a house fire destroyed the members’ home
After fire destroyed the members’ home, they withdrew money from their SMSF to pay for clothes and accommodation. The members also withdrew an amount to buy a car for their daughter so she could get to work. When their insurance claim was paid, the members paid most of the money back.
The withdrawals were not adequately documented and the members could not fully account for them. In addition, the amount withdrawn was not repaid in full and the members could not explain why.
2. Real estate leased to the members’ family trust
The SMSF owned real estate that was leased to a family trust controlled by the members.
It was of concern that:
- there was no lease agreement until after the arrangement finished
- rent was not paid for the whole term of the lease
- the SMSF did not try to enforce unpaid rent against the family trust
- money was transferred from the SMSF to the members to fix storm damage on the property, but no evidence could be provided to substantiate the expenses
- the storm damage was to cabins on the land owned by the family trust, so fixing them was a responsibility of the tenant and not the SMSF.
The AAT upheld the director’s disqualification even though the funds of the SMSF were not depleted and there was no dishonesty or intention to defraud in her conduct.
The AAT found breaches of the Superannuation Industry (Supervision) Act 1993
- section 35B (recording assets at market value),
- section 62 (sole purpose),
- section 65 (loans to or financial assistance to members),
- section 109 (arm’s length terms) and
- section 35AE (record keeping obligations).
While the SMSF had clearly breached these provisions, these breaches could have diminished or avoided altogether if:
- the SMSF and the family trust had entered into a written lease agreement when the arrangement started
- the family trust had complied with the lease agreement, including the payment of rent as stipulated
- the members could establish how the money withdrawn from the SMSF had been used
- the members could adequately explain the transactions
- the SMSF had obtained evidence of the value of the property.
Further, while we do not know the specifics of another penalties the ATO would have imposed, they could have issued administrative penalties totalling some $1,100,000 for the breaches which occurred. All of which would need to be paid by the directors personally, and not from the proceeds of the SMSF.
So remember, when it comes to super, it is all about the detail.
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