Sad stories of superannuation funds

Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

AS the ATO publication SMSF News informed readers on Friday, the SMSF regulator made 185 self-managed funds non-complying during 2009-10 for serious breaches of superannuation law.

The cost to a fund of being made non-compliant by the ATO is potentially devastating – to all of its members.

A non-compliant fund’s assets are taxed at the highest marginal tax rate, apart from any undeducted contributions (after-tax or non-concessional contributions).

In other words, depending upon its circumstances, a fund could lose almost half of its assets in tax.

At initial glance, it may not seem that 185 funds is such a large number. After all, there were almost 435,000 SMSFs in existence by the end of September.

However, a few points are worth considering here.

First, it’s not so long ago that the ATO seem to declare less than a handful of funds non-complying each year, if that. Indeed, the power of the ATO to declare a fund non-complying appeared to be rarely used.

Second, the fact that 185 funds have been made non-complying over 12 months will no doubt encourage prudent fund trustees to understand why.

The main four reasons for these funds being declared non-complying were:

  • Funds providing loans to a related party. A fund is prohibited from lending money or providing financial assistance to members and their relatives, among others.
  • Illegal early release of super.
  • Breaches of the in-house asset rules. A SMSF must not invest or lease to related parties of the fund (including members) more than 5% of its assets. The Cooper review has recommended that this 5% limit be cut to zero over a five-year period.
  • Refusal to lodge regulatory returns. The ATO reports that some funds simply won’t meet this most fundamental requirement.

In short, fund trustees should review these actions by the ATO as stinging reminders of action that may be taken when their fund does not comply with super law.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.

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