The rules of giving financial gifts from SMSFs to relatives

There are around 600,000 Self-Managed Superannuation Funds (SMSFs) in Australia where the members of the fund are also the trustees.

These trustees are responsible for managing the fund according to the superannuation rules. If they get it wrong, the consequences are significant.

SMSFs often lose their concessional tax allowance because the trustees recklessly or persistently ignore the rules. Superannuation rules are in place to ensure that your super is saved for your retirement and is not used for other purposes or invested without proper planning and due diligence. One rule in particular bans a super fund from giving financial assistance to members of the fund or their relatives. Whilst this sounds simple, it pays to understand how the rule works.

Who is classed as a relative?

The list of relatives in the rules is long and includes everyone you would expect including parents, grandparents, children, siblings, cousins, uncles, aunts, nephews and nieces. This includes step-children and in-laws. The rules also prohibit financial assistance gifts to a non-relative who then provides support to a relative. Attempting to find a loophole in the rules, such as this, is asking for trouble. It shows you knew the rules and were trying to get around them.

What is deemed financial assistance?

The rules of gift giving from SMSFs include a list of banned transactions that cover:

  • Gifts and loans;
  • Selling an asset to a member for less than its value;
  • Buying an asset from a member for more than its value;
  • Buying services that are unnecessary or at inflated prices;
  • Providing a guarantee or security using fund assets.

 

Examples of a SMSF Financial Assistance Gift

  • A SMSF holds works of art and the trustee gives a painting to his daughter as a birthday present. This obviously breaks the rules. If the trustee paid market value to the fund for the painting, he could then legally make the gift.
  • A SMSF owns a workshop that is leased to a business run by a member of the fund. The business has cash flow problems and misses the monthly rent payment. No action is taken to recover the debt and the fund is therefore providing assistance to the member.
  • A SMSF buys a printing machine and leases it to a business run by the members of the fund. When the lease expires, the business buys the machine from the fund at market value plus a margin to compensate the fund for the use of the money. This transaction is effectively a loan to the members and breaks the financial assistance rules.
  • A SMSF owns a block of land and the trustee sells it to her son at the market price. The son arranges to pay for the land in 12 instalments. Apart from exposing the fund to the credit risk that the son may default on the loan, the transaction breaks the financial assistance rule.

These are only a few examples of what you can’t do as a trustee of a self managed super fund.

SMSF Compliance

To reduce the risk of making an honest mistake, most trustees work with professional advisors to ensure they legally enjoy the flexibility and control that a SMSF offers. The rules are many, so do consult with one of our SMSF specialist advisors to ensure your setup and management is compliant. Contact our SMSF specialists here.

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