Although they may seem obvious, practitioners and trustees alike continue to be confused by potential breaches that are identified during an SMSF audit.
1. Not getting back to the auditor on time S.35C(2)
Trustees must ensure that requested relevant documents are given to the auditor within 14 days of the request being made. S.35C(2) is one of the regulatory requirements which includes a statutory time period. If the contravention is a breach of a statutory time period by more than 14 days, then the contravention must be reported. In other words, it is a reportable breach if it takes a trustee more than 28 days to provide documents requested by the auditor.
2. Bank overdraft S.67
Generally SMSFs are prohibited from borrowing money. There are only limited circumstances in which SMSFs can borrow money, such as when borrowing to settle securities (where borrowing is less than 7 days and 10% of the value of the fund’s assets) and borrowing to pay beneficiaries (where the borrowing is for less than 90 days and 10% of the value of the fund’s assets). When the balance of an SMSF’s transaction bank account is running low, the bank account may go into overdraft. Regardless of the amount of overdraft, the contravention rules still apply. If the amount is small, it is not reportable in the first year, but if the bank account is overdrawn for two years in a row, it has to be reported to the ATO.
3. Not signing ATO Trustee Declarations S.104A
Trustees of an SMSF that are appointed after 1 July 2007 are required to complete and sign an ATO-approved trustee declaration within 21 days of their appointment. This is another example of a regulatory requirement which includes a statutory time period. If the contravention is a breach of this time period by more than 14 days, then the contravention must be reported.
4. Buying a computer and proportionating its costs S.62
An SMSF can not pay for a computer given that the computer is also likely to be used for other private purposes. Similarly, an SMSF can not pay for travel expenses given that travel is also likely to be used for other private purposes. Unlike individuals and companies, SMSFs can not proportionate expenses with private elements between personal use and income producing purposes. Apart from disallowing payments with an element of private use, sole purpose test prohibits any activity that is providing current benefits to members such as storing a collectable item of the fund at home, or living in a holiday house owned by the fund.
5. No insurance for collectables R.13.18AA
Collectables and personal use assets must be insured within 7 days of acquisition. This rule applies to all collectables and personal use assets purchased from 1 July 2011. For items held by the fund prior to 1 July 2011, the fund has until 30 June 2016 to comply with this rule.