I needed cash and took it out of my SMSF can I say it was a loan?
The Australian Taxation Office (ATO) are concerned about increased activity of illegal early access superannuation benefits from a self-managed super fund (SMSF) being disguised as a loan to a member.
It is not uncommon to find out at the end of a year that cash was withdrawn and used by a SMSF member. Was it a loan, illegal early access or a genuine mistake?
A loan to a member is a breach of the superannuation laws and regulations (SISA). However, it is often seen as the lesser of two evils.
A payment made to a member before they have satisfied a condition of release such as turning 65 or retiring after they turn 60 is a breach of the SISA payment standards which can also be considered as illegal early access to super benefits.
Was this an honest error, like mistakenly transferring funds from the SMSF bank account instead of the member’s individual account? If that is the case and you can demonstrate it, the resolution might just involve reimbursing the SMSF as soon as the mistake is identified. In these situations, the SMSF auditor might also breach the fund for not maintaining a clear separation between the fund’s assets and the personal assets of the member/trustee. Typically, this is considered a minor breach and can be easily corrected.
Penalty for illegal early access
The penalty for illegal early access can be applied at the member level and also at the trustee level. The amount withdrawn is included in the member’s personal tax return and taxed at the member’s marginal tax rate with possible shortfall tax penalties and interest payments also being applied. Depending on the seriousness of the breach the SMSF trustee may face administrative penalties up to $19,800 per breach, per trustee and even disqualification as an SMSF trustee.
Penalty for lending money to a SMSF member
Providing loans to a member is not allowed under SISA, and it also breaches the sole purpose test as well as potentially breaching the in-house asset rules if it exceeds the 5% threshold for in-house assets. The loan can be repaid along with interest to the SMSF, this does not negate the breach occurring but does apply as a mitigating factor for the ATO when they consider any penalties to apply. If the breach is severe, an administrative fine of up to $19,800 for each breach per trustee may be imposed.
When is the withdrawal a loan?
Only when the money is provided to a related party or business and does not exceed 5% of the total SMSF balance. Loans directly to members are strictly prohibited and will always count as an early access breach.
If loaning to a related party or business, the intention of the SMSF trustee and the borrower is critical.
For a loan to qualify, the borrower must demonstrate an intention to repay it. The most compelling proof of this is a formal loan agreement established between the borrower and the SMSF trustee, which outlines the loan’s terms and conditions with principal and interest repayments. These terms should align with standard commercial practices, including considerations for loan security, repayment of both principal and interest, the loan duration, the applicable interest rate, and measures to address default. The loan agreement must be executed and dated prior to the loan’s commencement. Additionally, any correspondence between the trustee and the borrower regarding the loan request, along with trustee meeting minutes discussing the loan, will serve as supporting evidence.
Simply backdating loan documents to dress up the withdrawal as a loan is the mischief the ATO is flagging as a concern. It is easily recognisable as the evidence lacks the usual regular repayments you would expect with a properly constructed loan agreement.