A self managed superannuation fund (SMSF) is required to comply with the SIS regulations and when it doesn't, there is a chance the ATO could deem it non-complying and consequently it will lose its tax concessions.
Now a simple error may not have this drastic outcome, but breaching the rules and then trying to cover it up most probably will.
Take an example of a fund that has a mum and dad as the individual trustees of the fund. They go to purchase a property in the funds name but as it is the trustees name that needs to be put on the title deed, it causes some confusion with other institutions such as the bank.
Let's say the bank is then refinancing the loans for the couple and sees that another property exists in their own name and organises to take security over that property which is actually owned by the self managed fund. But because only the trustee names appear on the title, it is inadvertently picked up and used as security for other loans, or even worse, used to borrow further funds. This is a clear breach of the rules for the superfund as assets can't be used as security for other borrowings.
If this is an accident done by the bank and it can easily be removed from their security, then the ATO may accept the breach can be rectified and not deem the fund to be non-complying.
However, if the trustees did this deliberately and in doing so borrowed further funds, and even worse, did not disclose it to the auditor, then it may not be viewed very favourably by the ATO when they finally find out, and the worse situation is the fund is declared non-complying.
This would result in taxing the fund at 45% of the funds market value of assets, less any non-concessional contributions. And in making the fund non-compliant the funds earnings subsequent to that year will also be taxed at 45%. If you are in pension phase, then you can kiss the Nil% tax rate goodbye as well.
What can you do to avoid this error in the first place? Ensure you have the correct name on the title deed of a property the super fund is going to own, and where able, ensure the trustee name(s) have at least "atf" after the names to indicate the property is being bought in trust. Not all solicitors will do this, but you should at least request it. Another option is to ensure a deed of trust is lodged with the titles office to indicate the property is being held in trust.
The other issue is to completely understand you don't own the property if you buy it using your super fund. It will never be a property you can borrow against, SO JUST DON'T DO IT.
Don't let simple errors result in you losing your retirement life savings.
