Why self-managed super funds face $6,000 penalties for breaking complex tax rules

Traders, real estate agents and accountants with self-managed superfunds face thousands of dollars in fines if they accidentally break complex tax rules that prohibit tinkering with their retirement savings or assets.

Strict rules prohibiting “arm’s length transactions” were introduced in July 2018 to prevent self-managed funds from buying or leasing assets below market value.

The regulations prevent, for example, a property owned by a self-managed fund from being rented at a couple’s price to a relative of the trustee.

But accounting groups warn that the rules are so complex that anyone with a self-managed fund who applies “their professional or business skills to their personal life” could be penalized.

They argue that violations could include using a work laptop to complete personal tasks or an accountant filing self-managed funds taxes without being paid for it.

A real estate agent who sold an investment property within your super fund could be in trouble for not charging a commission.

And so could a tradedie who revamped an investment property and failed to bill their self-managed fund.

Under the ‘arms length’ rules, someone with a typical super balance who makes close to an average salary could be hit with $6,000 in tax penalties if they worked for free.

Assistant Treasurer Stephen Jones was urged to change the rules regarding Australia’s 600,000 self-managed funds when he addressed the SMSF Conference in Melbourne on Thursday.

CPA Australia, Chartered Accountants Australia and New Zealand, Institute of Financial Professionals Australia, Institute of Public Accountants, National Tax & Accountants’ Association, SMSF Association and The Tax Institute issued a joint statement condemning the rules.

“Australian workers could take a hit in their super simply by applying their professional or business skills to their personal lives due to complex restrictions on non-arm’s length transactions,” they said.

‘Professionals and skilled trades are not trying to circumvent the rules. It’s just easier and often makes financial sense to do these tasks yourself.’

The accountants cited the case of someone who has $135,000 in super and earns $90,000 a year, which is slightly below the median super balance of $145,388 and the median full-time salary of $94,000.

Someone in this position risked $6,000 in tax penalties for accidentally breaking the rules.

Accountants argue that some of the ‘arms’ distance’ rules are so complex that an Australian with a typical super balance earning close to an average salary could be hit with $6,000 in tax penalties (pictured, a file image)

Pressure was put on assistant treasurer Stephen Jones to change the rules regarding Australia’s 600,000 self-managed funds when he addressed the SMSF Conference in Melbourne on Thursday.

Jones noted in his speech that there were more than 600,000 self-managed superfunds with assets worth $870 billion.

Australia is home to 16 million retirement accounts with a collective value of $3.3 trillion.

‘That’s a lot of money. It’s an Australian story we can be proud of,” Mr Jones said.

‘But no public policy can or should be ‘set and forget’.’

He also reiterated the Labor Party’s call for super funds to invest in projects that align with key federal government priorities.

‘The funds want to do it. They want to work in partnership with the government to invest in things like infrastructure, whether it’s roads, railways, ports, airports, healthcare infrastructure or elderly care,” he said.

They want to do it. Many of them are already doing it. We want to lift that up and make sure we can do it in partnership and make sure we can take some of the friction out of the process.’

Self-managed super funds can be used to purchase a residential investment property, as long as it is not rented to a relative.

H&R Block’s director of tax communications, Mark Chapman, said the rules were strict.

“Therefore, you are not allowed to buy a holiday home on your SMSF and live there over the summer,” he told Daily Mail Australia.

Small businesses can also purchase commercial property, but the rent must be paid back to the self-managed fund at market rates, with the funds saved for retirement.

Australians with a self-managed superfund have until February 28 to file their annual return for the previous year, but can get an extension until May 15 if they used a tax agent.