Alert for new SMSF trustees

Trustees of new self-managed funds beware: the tax office is intensifying its focus on your activities.

From July 1 of this year, fund auditors are required to report to the tax office - in its role as regulator of self-managed super - any of a long list of legal contraventions by trustees of funds that are less than 15 months old. (See: http://www.ato.gov.au/content/downloads/spr_n72208-06-2008.pdf)

These contraventions include breaching the sole purpose test (that requires for funds to be maintained for the core purpose of providing retirement and death benefits for members), and providing financial assistance to members or their relatives.

Other contraventions by new funds that are automatically reportable to the ATO include borrowing from a SMSF (certain exceptions exist for short-term loans), failing to purchase assets on an arm's length basis, and exceeding the in-house asset ratio. (With exceptions, funds are not permitted to invest more than 5% of their assets (the in-house asset ratio) with related parties. This restriction includes the leasing of most fund assets to related parties.)

The logic of zooming in on new trustees in this way makes much sense.

The tax office will become better equipped to concentrate more of its efforts on new trustees who are failing to comply with superannuation laws. And it creates an opportunity to stamp out bad habits early.

The initial findings of a tax office survey of new trustees, highlighted by Smart Investing™ on several occasions, showed that 30% of those surveyed could not explain the most fundamental of all SMSF rules: the sole-purpose test. And a quarter of new trustees surveyed were unaware of restrictions on the type of assets that their funds could acquire.

These survey findings have clearly disturbed the Minister for Superannuation, Nick Sherry, as well as senior tax officers.

The challenge for the tax office will be to plough through a possibly heavy load of reported contraventions under the new reporting arrangements for new trustees - and then to take appropriate action.

In another initiative, new trustees have been required since July 2007 to sign a declaration that they understand their obligations and responsibilities. (See: http://www.ato.gov.au/content/downloads/n71128.pdf)