There is an important undercurrent with being responsible for the running of a Self Managed Superannuation Fund (SMSF) – the fund must be able to “wash its own face” – to cover its own expenses.
If a member/trustee pays for a fund expense on behalf of the fund, and if the member/trustee does not seek reimbursement for this expense immediately, the amount will be treated as a contribution to the fund.
Australian Tax Office (ATO) Taxation Ruling TR 2010/1 Income tax: superannuation contributions states a superannuation contribution is ‘anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all members in general’.
The meaning of contribution is therefore wider than just a direct payment of money or an in-specie transfer of an asset to the SMSF.
For instance, the capital of an SMSF may be increased by something of value provided directly or indirectly in a number of ways, including:
- Personally paying an invoice to a third-party and thereby benefiting the SMSF.
- Example; payment of the SMSF’s ASIC fees or accounting fees by a member from the member’s own bank account;
- Creating rights in the SMSF.
- Example; a right to receive distributions of income or capital from a discretionary trust; and
- Shifting value to an asset owned by the SMSF.
- Example; an improvement to an SMSF asset where the SMSF has not paid for that improvement
Therefore, whenever the capital of an SMSF may be increased the SMSF trustee should consider whether a contribution has been made and, if so, check that the contributions caps in that year are not exceeded. Otherwise, excess contributions tax is payable.
To further complicate the matter, a member may not be eligible to actually make a contribution to the fund due to their age and/or working status.
If the trustee/member does not seek immediate reimbursement, but does so at a point in time in the future, then the fund has technically borrowed from the member to cover the expenses. This type of borrowing is not permitted, and is considered a breach of the legislation.
Just adopt the KIST (Keep it Simple Trustee) principle, pay all expenses of the fund from the fund! Should the auditor report a breach to the ATO, the ATO may issue fines and penalties to the trustees which have to be paid personally.
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