ATO warns self-managed super funds on loans made through trusts

The Australian Taxation Office has warned thousands of self-managed superannuation funds it will be carefully watching to make sure members aren’t distributing funds to themselves or relatives via investments by the super fund in trusts.

The ATO warns members they could be breaking tax regulations by distributing funds via these methods and as a result, must be vigilant in ensuring they do not break laws unnecessarily.

The ATO says most members using this type of method set up a trust, “which purports to offer fixed rate interest yielding investments to allegedly unrelated entities”.

The SMSF then invests in the trust, after which the organiser sources “borrowers” for the trust. These borrowers can often include the same members of the SMSF that invested in the trust.

These borrowers then enter into a loan agreement with the trust. Liz Westover, head of superannuation for the Institute of Chartered Accountants, says these loans can often offer better deals than members would be able to source otherwise.

“Many times, it could just be that these people are using the trust as a way of accessing money rather than going to the bank for a loan. The figures indicate that 22% of reported contraventions to the ATO are found around loans and financial assistance.”

The ATO also notes some of the benefits of these loans could include a range of interest rates, a range of interest payment terms, including flexibility in the payment date, and security of the loan in the form of a mortgage or personal guarantee.

“When they talk about financial assistance, it could be something as simple as changing interest rates or giving you more options. It’s not just a straight-up loan,” Westover says.

The ATO also states the borrowed funds could be used for multiple purposes, including business, investment or personal use. However, as Westover points out, taking out such loans contradicts the nature of SMSF legislation.

“There is a sole-purpose test. The whole point of super is to save for your retirement. If people are using the resources of the fund for other purposes, then they are simply not complying with the test.”

The ATO points out that not only could SMSF members breach the sole purpose test, but income derived from the SMSF could be classed as ‘non-arm’s length income’ and be subject to a higher rate of tax.

The trustee could also have breached several other laws, including illegally accessing super benefits if they do not pay back the loan from the trust. The investment in the trust could also be classed as an in-house asset, and therefore subject to certain limits.

“This arrangement attempts to circumvent the prohibition on SMSF trustees lending money or providing financial assistance to a member or a relative of the member using the resources of the fund,” the warning states.

The ATO also notes that penalties can apply to SMSF members if they make misleading statements or avoid tax, but also note that “reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office”.