Self-managed super funds (SMSFs) have the potential to offer Australians greater control over their retirement savings, empowering individuals to tailor their investment strategies to suit their needs. However, with this control comes the significant responsibility to adhere to strict rules and regulations. One particular area of concern is the illegal early access of super and prohibited transactions. It’s essential for SMSF trustees to understand the intricacies of these regulations to ensure compliance and the integrity of their retirement savings.
We discuss some of the prohibited transactions that SMSF trustees need to be aware of.
Illegal Early Access of Super
According to the Australian Taxation Office (ATO), there has been a concerning trend of illegal early access to super funds. In the 2020 year, an estimated $381 million of super was illegally withdrawn by trustees. This figure decreased slightly in 2021 to an estimated $256 million. Additionally, SMSFs entered into over $200 million in prohibited loans each year during this period.
To access super assets, the member must first meet a condition of release. The most common conditions of release are:
- – Reaching preservation age and retiring
- – Reaching preservation age and commencing a transition-to-retirement income stream
- – Ceasing employment after turning 60
- – Reaches 65 years old (regardless of employment status)
For more information, take a look at our article on when you can access super. If you’re unsure, it’s always a good idea to seek financial advice to ensure you are not illegally accessing your super.
Understanding Prohibited Transactions
A critical aspect of managing an SMSF is ensuring strict compliance with the rules to maintain the fund’s compliance status. If you engage in prohibited transactions — even unknowingly — you may be met with severe penalties, including the loss of valuable tax benefits and jeopardising the fund’s compliance standing.
Examples of Prohibited Transactions
The following transactions shed light on common situations that SMSF trustees may encounter and the potential implications of their decisions:
Rent-Free Accommodation: Trustees may wonder if one of their fund’s investment properties can be used by a fund member or their relatives rent-free. Providing financial assistance in this manner is strictly prohibited — even allowing a related to stay in the investment property short-term can land you in trouble. The reason being that such actions divert SMSF assets from their intended purpose of providing retirement benefits.
Providing a loan from the SMSF: If your SMSF has built up a cash reserve, it might be temping to consider borrowing money from the SMSF and repaying it with interest. However, SMSFs are never allowed to lend money to members or their relatives, even with the intention of repayment. This rule ensures that SMSF assets are not used to provide financial benefits to members or their associates before retirement.
Early Access to Super: Trustees might contemplate withdrawing money from the SMSF to assist a family member financially. However, this constitutes illegal early access to super, as it does not meet the conditions for release specified by the ATO. Super funds are intended to support members in retirement, and accessing funds before retirement undermines this purpose.
When Can You Legally Access Your Super?
As discussed above, you must meet a condition of release to legally access your superannuation. It is illegal to access your super for any reason other than when allowed by superannuation law.
Importance of Compliance
Engaging in prohibited transactions can lead to significant consequences, including loss of tax benefits and disqualification as an SMSF trustee. It’s crucial for trustees to understand and adhere to the rules to safeguard their retirement savings and maintain compliance with superannuation laws.
Partnering with SMSF Loan Experts
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If you’re interested in purchasing property inside your SMSF, contact us today to discuss how we can assist you in navigating the intricacies of SMSF borrowing.