The most common SMSF contraventions and how to avoid them
A practical rundown for accountants and professionals of the breaches that most often appear in SMSF audits, and how to keep funds clear of them.
By Tash ·
Most SMSF contraventions are not exotic. The same handful of breaches account for a large share of the contravention reports lodged each year, and almost all of them are avoidable with good administration. This article sets out the most common contraventions and the practical steps that prevent them.
Loans or financial assistance to members
A fund must not lend money or provide financial assistance to a member or a member’s relative. This is one of the most frequently reported breaches, and it often appears in disguised forms: fund money used for a member’s personal purpose, a related party debt to the fund left uncollected, or rent owed by a related party and never paid. To avoid it, keep fund money strictly separate from personal money, and ensure any amount owed to the fund by a related party is genuinely collected on commercial terms.
In-house assets over the 5% limit
In-house assets, broadly loans to or investments in related parties, must not exceed 5% of the fund’s total assets. Funds breach this by acquiring a related party investment that pushes them over the limit, or by relying on an exemption that has failed. To avoid it, test the in-house asset position before acquiring any related party investment, and where the fund relies on a non-geared related trust or company exemption, confirm every year that the strict conditions are still met, because a single breach ends the exemption permanently.
Separation of fund assets
Fund assets must be held in the name of the fund or the trustee for the fund, and kept separate from members’ personal assets. Breaches arise when a bank account, share holding or crypto wallet is in a member’s personal name, or when fund and personal assets are mixed. To avoid it, ensure every asset is titled correctly in the fund’s name from the moment it is acquired.
Assets not at market value
Every asset must be reported at market value at year end on objective, supportable evidence. A common breach is carrying an asset, often property or an unlisted investment, at an unchanged or unsupported value year after year. To avoid it, obtain proper valuation evidence each year, using more than one source for property, and never simply roll a value forward without support.
Acquiring assets from related parties
A fund generally cannot acquire an asset from a related party, with limited exceptions for listed securities and business real property at market value. Breaches occur when a member transfers personal property, crypto or other assets into the fund. To avoid it, check the acquisition rules before any asset moves from a related party to the fund, and remember that most asset classes cannot be transferred in this way.
Sole purpose breaches
The fund must be maintained solely to provide retirement and death benefits, not a present-day benefit to members. Breaches arise when a member uses a fund asset, such as a property, holiday home or artwork. To avoid it, ensure no member or related party uses or enjoys a fund asset, and treat any personal use as a serious problem. The sole purpose test is the rule against which this is judged.
Minimum pension payment failures
A fund paying a pension must meet the minimum payment for the year. A shortfall, even a small one, can cause the pension to be treated as having stopped, with the loss of the earnings tax exemption. To avoid it, calculate the minimum on the correct opening balance and age, and confirm the full minimum is actually paid before year end.
The common thread
Almost every common contravention comes back to two habits: keeping fund money and assets genuinely separate from personal ones, and dealing at arm’s length on proper terms with anyone connected to the members. Funds that get those two things right, value their assets properly each year, and pay their pensions correctly rarely end up with a reportable breach.
The bottom line
The contraventions that fill auditors’ reports are predictable and preventable. Strong separation of assets, arm’s-length dealing, proper annual valuations and correct pension payments keep a fund clear of almost all of them. Building these checks into the year end process is far cheaper than dealing with a contravention after the fact.
This article is general information for professional readers and is not advice on any specific fund. The superannuation legislation and the applicable auditing and ethical standards govern in each case.
Common questions
- What are the most common SMSF contraventions?
- Loans or financial assistance to members, in-house assets over the 5% limit, failure to keep fund assets separate, assets not reported at market value, acquiring assets from related parties, sole purpose breaches, and minimum pension payment failures.
- How do you avoid an in-house asset breach?
- Test the in-house asset position before acquiring any related party investment, and where the fund relies on a non-geared related trust or company exemption, confirm every year that the strict conditions are still met, because a single breach ends the exemption permanently.
- What is the common thread behind most SMSF contraventions?
- Two habits prevent almost all of them: keeping fund money and assets genuinely separate from personal ones, and dealing at arm's length on proper terms with anyone connected to the members.
- Why does an unsupported asset value cause a contravention?
- Every asset must be reported at market value at year end on objective, supportable evidence. Carrying an asset at an unchanged or unsupported value year after year breaches the valuation requirement and is a common reason a fund is reported.