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The drop in investment values has caused problems for many self-managed superannuation funds with in-house assets.

Partners Superannuation Services research has revealed 11.25 per cent of self managed superannuation funds (SMSFs) breached in-house assets limitations during 2008.

Under the Superannuation Industry Supervision (SIS) Act, an SMSF is not allowed to hold in-house assets that total more than 5 per cent of the value of the fund.

In-house assets include loans to, investments in, or the lease of equipment to businesses owned by the fund or those associated with the fund.

The rule had presented itself as a problem to SMSF trustees in the past, with 10 per cent of funds transgressing in 2007.

However, one of the main reasons for the breaches of the limit last year was the fall in investment markets.

“For example, if your fund previously had $100,000 worth of assets, a 5 per cent loan would be $5000. However, should the value fall to $50,000, $5000 would in effect translate to 10 per cent,” Partner Superannuation Services director Martin Murden said.

Despite these breaches SMSFs were improving their compliance track records, according to Murden.

“Clearly fund trustees are making a much greater effort to truly understand what is expected of them in their roles,” he said.

“They’re reading the literature which is now readily available through the Australian Tax Office and they’re attending seminars … which aim at informing and educating trustees about their rights and obligations.”

The survey was based on a sample size of over 500 SMSFs audited during 2008.

During March the Australian Tax Office will be running seminars for trustees of self managed superannuation funds in regional locations throughout Australia.

They will be covering information that is relevant to SMSFs.

Stephen Hall, Superannuation partner at Thomson Hall recommends that all trustees attend.

Topics covered will include:

• Tax obligations for SMSFs, and
• Recent changes to super and how these changes relate to SMSFs.
• What is a SMSF?
• Trustee obligations
• Investment restrictions
• Contribution and benefit payment rules
• Recent changes to super
• Our compliance program
• Where to go for help

Also, new topics that the ATO will be covering in these seminars include:

• SMSF annual return
• Instalment warrants (which are a way that super funds may borrow money for the purchase of investment assets)
• In-house asset transitional arrangements
• Trust deeds
• Crystallisation calculator
• Benefits calculator

Details of locations, dates and registration information are at the ATO Super website

The trustees of a self managed superannuation fund have been issued penalties of $30,000 and ordered to pay $32,500 in costs for breaching the rules relating to their fund.

On 15 October 2007 the Federal Court declared that the trustees for the Axent Group self managed superannuation fund (SMSF) had breached superannuation legislation by selling a property belonging to the fund and using the proceeds of nearly $150,000 to pay a private debt.

The couple had accessed assets in the superannuation fund before meeting any conditions of release such as retirement or reaching preservation age.

Deputy Commissioner Raelene Vivian said the action was part of an increased compliance focus on SMSFs by the Tax Office.

“The main purpose of SMSFs is to provide for retirement. Trustees who access their superannuation without meeting a condition of release are breaking the law and risking their retirement savings.

“The Tax Office provides a range of educational material to ensure trustees are aware of their roles and responsibilities.

“It’s vital SMSF trustees make sure they understand their legal and regulatory obligations as they are legally responsible for managing their fund.

“SMSFs which do not comply with the legislation are at risk of prosecution, penalties and additional tax,“ Ms Vivian said.

ATO press release
For more information about SMSFs, whether they are right for you and an SMSF checklist visit www.ato.gov.au or contact Stephen Hall or Gavin Thomson at Thomson Hall

The Federal Government has overturned a longstanding ban on borrowing by self-managed superannuation funds (SMSF).

Many funds had, for years,been investing in instalment warrants until the Australian Taxation determined that some warrants constituted a borrowing by the fund.

Instalment warrants are now an eligible form of gearing for an SMSF, following an amendment to the Superannuation Industry (Supervision) Act that allows a gearing exception to the ban.

The amendment became effective late last month.

The asset must be one that the super fund trustee is permitted to acquire and hold directly.

The gearing exception covers unlisted and listed instalment warrants and certain geared acquisitions such as real estate.

It means SMSF trustees will potentially be able to borrow far more in order to buy shares or lifestyle assets, such as boats, cars, artwork and property.

An instalment warrant allows the buyer to pay an initial fee to acquire an underlying asset with an option to pay a second fee to acquire the legal title of that asset.

Before 1999, SMSFs could borrow through a unit trust arrangement, but Australia’s then prime minister, Paul Keating, overhauled the provision.

Townsends Business and Corporate Lawyers special counsel Michael Hallinan said it was possible the Federal Government had not realised the scope of the legislation.

Speaking at a seminar on October 17, Hallinan said the impact would go far beyond the title “investment by superannuation funds in instalment warrants”.

“Arrangements other than instalment warrants will be included in the borrowing provision,” Hallinan said.

Hallinan said lenders would have no recourse to sue an SMSF trustee for defaulting on the loan arrangement, for example, if a trustee borrowed to buy property.

“If a super fund defaults on the loan, the lender will use the mortgage to obtain the house,” he said.

Townsends principal Peter Townsend said SMSFs that could not afford to buy into the tough Sydney property market would now be able to.

Townsend said “Once the rubber hits the road, there’s going to be enormous interest in this,” .

Hallinan said the because the arrangements were more complex than normal gearing, they were likely to involve more parties and higher fees.