Spike in number of SMSFs in breach of borrowing requirement

The number of self-managed superannuation funds in breach of borrowing requirements increased over the past year, according to research by the Partners Wealth Group.

The research is based on over 600 SMSFs across Australia audited in 2014 and found 23% of funds with a relevant breach were in breach as a result of borrowing requirements.

This is a significant increase from 12% of funds the year before.

However, overall the number of SMSFs requiring a contravention report to be lodged with the ATO has fallen over the past year in line with the past seven years.

Partners Wealth Group director of SMSF consulting and auditing, Martin Murden, attributes the increase in breaches to a misunderstanding of the rules.

SMSFs are entitled to borrow under limited circumstances in order to pay benefits, settle on investments and acquire investments via a limited recourse borrowing arrangement (LRBA).

“Because borrowing via a LRBA is relatively new and has been subjected to several rule changes since inception, my suspicion is that there has been confusion, resulting in some SMSF trustees thinking it was permissible to use their fund to borrow to overcome a short-term liquidity problem – much like a small business seeking a temporary extension to a bank overdraft in difficult circumstances,” Murden said in a statement.

Two other key areas of transgression highlighted by the Partners’ research came from funds taking personal loans for members and funds breaching the in-house assets rule.

Murden said, periodically, loans occur by mistake. For example, using the wrong cheque book (that of the SMSF) to pay a personal expense. On other occasions members are simply in need of money and there is no one to stop them from borrowing from the fund.

“However, it is important to remember that while the loan may appear small in dollar terms and when compared to overall fund assets, personal loans are simply not allowed under super legislation. They’re an absolute no-no and size is no excuse,” Murden said. 

Graeme Colley, director of technical and professional standards at the SMSF Professionals' Association of Australia (SPAA), said the spike probably means auditors are being more fastidious in analyzing the operation of SMSFs.

“Hopefully with requirements for the registration of auditors, the auditors that are left in the registration group are taking their jobs more seriously as they have greater obligations in reporting to ASIC,” he says.

“We may see an increase again simply because of the thoroughness of the audits that are conducted.”

Colley says the types of breaches identified by the Partners Wealth Group are not surprising.   

“The main issue is people taking money out of their funds, in-house assets which is next and then separation of assets,” he says.

“Mixing assets is really serious as it means SMSF trustees may be putting their hand into the operation of the fund.”

This article first appeared on SmartCompany.