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I am auditing 2023 which has repeated contraventions of loans to related party, year after year since 2018. The loans were always repaid during the same financial year with accrued interest outstanding in the balance sheet. Becasue the amount is always over the 5% of the fund's gross asset, and due to the trustee's behaviour, we always lodged ACR year after year. So far ATO has not issued any notices to the trustee.
In March 2023, the trustee emptied out the bank account and loaned it to a related party and immediately closed the bank account. In June 2023, the related party remitted, by EFT, part of the loan to an APRA fund in the member's name. Member prepared a rollover statement himself. APRA fund accepts the amount and the roll over statement. It is not clear as to how the APRA fund treats the remittance. The related party loan has not yet been full repaid by 30.06.2023, and besides, the SMSF has no bank account.
Issues: the SMSF cannot be wound up in 2023 as fund still has investments there. Can the remittance from the related party directly to the APRA fund be taken as partial repayment of a loan? Is closing a bank account an indication of winding up? What are the key contraventions and likely penalties of the Fund's conduct?
Multiple ACRs have been lodged over the past few years with no action from the ATO. The trustee thinks he can get away with this and continues to operate in the same manner.
Please advise your comments.
Hello Stephen
Another very interesting question.
No doubt it is frustrating when funds with the most egregious of breaches of the SIS Act receive no attention from the ATO.
As you refer to, it is most unusual that an APRA fund apparently processed a rollover, not from an SMSF, but from a related party of the SMSF.
I am curious to know how this transfer is reflected in the member’s account in the APRA fund (as you make reference to, it is not clear as to how the APRA fund treated this EFT remittance).
You ask whether it would be possible to treat the remittance from the related party directly to the APRA fund as a partial repayment of the loan the fund has made to the related party?
Without reliable documentary evidence from the APRA fund confirming that the payment had indeed been treated as a rollover from the SMSF, this assertion that it represented a partial repayment of the loan from the SMSF should not be accepted.
It is possible that the APRA fund simply treated the cash payment from the third party as a non-concessional contribution form the fund member.
The closing of the SMSF’s bank account of itself does not prove that the fund has been wound up. Indeed, the fund still has assets, being the loan to the related party.
The key contraventions in relation to a loan to a related party representing most of a fund’s assets are likely to be (all legislative references are to the SIS Act):
- Sole purpose test (section 62).
- Loan a to a member or relative (depending on who the related party is) (section 65)
- In-house asset rules (section 84)
- Arm’s length requirements (section 109) assuming, amongst other things, that the terms of the loan are not arm’s length.
Based on section 193 the breaches listed above are all provisions of the SIS Act that are considered to be a civil penalty provision.
Based on section 196(3) a court could potentially make an order against a person that has breached a civil penalty provision to impose a monetary fine not exceeding 2,400 penalty units (for each breach).
For breaches committed between 1 July 2021 to 31 December 2022 a penalty unit is $222. For breaches committed between 1 January 2023 and 30 June 2023 a penalty unit is $275.
As to whether the ATO as regulator, would take the trustee/directors of the corporate trustee to court in relation to these breaches is only something the ATO can address.
The ATO can also issue administrative penalties to SMSF trustees (without going through the courts) – 60 penalty units for, amongst other things, a breach of the in-house asset rules or a lending money to a fund member or relative.
Trustees of SMSFs can also be disqualified from being trustees of a superannuation fund.
SMSFs can also be made non-complying (triggering a potential 45% tax liability on the market value of the assets of the fund).
The above discussion is not intended to be an exhaustive consideration of the penalty regime for breaches of the SIS Act. It is designed mainly to offer some examples that could be provided to a fund member of the worst-case scenario outcomes where trustees routinely engage in breaches of the most serious kind.