Lifting the lid on SMSF traps

Peter Johnson, current as of: 9 April 2018.

While Peter Johnson is the first to say there aren’t too many obvious dangers in SMSFs, he proffers a stark warning about traps that lurk just beneath the surface.

“As an accountant, I get that it’s accepted practice for us to turn to legal cases and precedents to ensure they comply with the latest super rules. We review what judges from the higher courts have to say, and take their comments into account when providing advice to clients.

“In the case of superannuation, however, I am concerned that many accountants aren’t aware that trust, not superannuation, law is the first law governing a super fund.

“It’s a bit of a trap that can get accountants, and their clients, into trouble.”

What makes this reliance on superannuation law even more fraught is the lack of super cases that have gone to trial. The vast majority of cases are settled before they come to court, leaving few rulings available for reference.

Peter’s concern is that accountants aren’t able to remain up-to-date and compliant with the rules governing SMSFs, because they struggle to access the latest information.

“I estimate that up to half of accountants are unaware of the rules and are making the wrong assumptions about what SMSFs are able to do,” he said.

Financial & reputational fallout

Related party loans

Incorrect assumptions that are often made in relation to related party loans include:

  • Taking out a second loan without a mortgage;
  • Making a loan on a temporary basis; and
  • Taking out a loan to buy units in a unit trust.

Any breach of the rules will result in clients paying 47 percent tax instead of 15, and the accountant facing a hefty compensation claim.

Unit trusts

There is a great deal of misunderstanding around pre-1999 unit trusts, with accountants neglecting to look at post-2009 units. These may, in fact, be inhouse assets, with clients forced to sell out of their unit trusts and the accountant taking a reputational loss.

Trust deeds

Peter also cited a number of cases heading to court where trust deeds were not done correctly, resulting in clients missing entitlements.

“It’s too easy to think ‘she’ll be right mate’ when it comes to deeds, and then the lawyers end up getting involved,” he said.

Consider the following case, as it’s likely this accountant will be sued by the client:

  1. A deed of amendment in an SMSF named only one trustee, when there were two trustees in the fund.
  2. The initial error was made by the accountant, who prepared the deed of amendment via an automated online document provider, which also failed to pick the error up.
  3. This issue remained undetected until the member died and the second trustee (who didn’t want to pay the death benefit in accordance with the binding nomination) sought legal advice.
  4. It is in the advice stage now; however, the legal opinion is that the BDBN is not effective and the beneficiary (who is a client of the accountant) will miss out on their death benefit.

“It’s the technicalities of the rules governing superannuation funds that are most likely to trip people up. And it’s particularly challenging to remain compliant when very few super cases make it to court.

“Having expert scrutiny over rule changes and amendments could make all the difference for accountants.”

If you have any concerns about the rules of SMSFs please contact the team.

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