My Mum has often said “desperate times call for desperate measures”.

This came to mind when reviewing two recent Federal Court cases, which involve accessing money in an SMSF for business and personal purposes. In both cases, the trustees were fined.

Overall, the temptation not to raid the SMSF’s bank account proved too great.

This is a major risk for all SMSFs, especially those who run businesses.

People dip into their SMSF capital to prop-up a business that will probably fail anyway. They prolong the inevitable death of the business and end up losing it, and sometimes a big portion of the super fund’s assets via fines and penalties.

Early Sunshine

Early Sunshine Pty Ltd was the trustee of an SMSF. The members of the fund ran a NSW-based freight trucking business, which had suffered from poor trading since 2001 after it lost a major client. From 2007, the survival of the business was put under further strain by the GFC and slow payment of invoices by clients.

Between June 2007 and June 2011, just over $550,000 of SMSF money was loaned to the business. No loan was more than $20,000 and the average loan was about $7,800. Each loan was short-term, typically about three weeks, but no interest was paid on these loans and no security was sought for these loans.

One small loan was made to another related party. This loan was made without security but interest was payable.

The business’ difficult trading conditions created obvious cash flow problems. It regularly had insufficient funds to pay staff salaries and wages. The proprietors could either keep the business running or close it down. They elected to temporarily use the SMSF’s money to prop up the business.

All loans from the SMSF were repaid in full.

The ATO was alerted to the super law breaches by the fund’s external auditor.

In August 2011, the members of the fund moved their investments to TWU Super (an industry fund related to the transport industries) and since that time the fund has been dormant.

When push came to shove, the trustees made full admissions to the ATO of their wrongdoing and said they were sorry for their actions.

Given their contrite demeanour, the super fund doesn’t appear to have been made non-complying, which would have seen the fund’s tax rate increase to 47%. In the first year this penalty is imposed, it applies to the assets of the super fund and by the time the ATO might have imposed this very little remained in the fund.

The breaches committed by Early Sunshine were:

• Sole purpose test – the fund wasn’t run solely for the purposes allowed in the super legislation because its assets were loaned to a related party, which means the fund members were receiving a benefit from the fund before they were entitled.
• In-house assets test – this test restricts the amount of money a super fund can loan to parties related to the fund including related businesses; this test also restricts loans and leases to related parties
• Arm’s length dealing – this rule requires super funds to only conduct transactions in such a way that the super fund at least receives commercial terms or better

Fines

The Federal Court imposed fines of $13,000 on each of the individuals involved in the super law breaches and each had to pay $5,000 to the ATO towards its costs of prosecuting this case.

However, the fines could have been $220,000 plus a substantial amount more for the ATO’s costs.

Ryan

In 2007, Mr and Mrs Ryan sold an unsuccessful dry cleaning business.

The sale proceeds didn’t cover the line of credit they had taken on their home loan to support the business. By June 2009, they were struggling to meet their personal expenses and the interest on the line of credit.

They solved this cash flow shortfall by borrowing a total of $210,000 from their SMSF between June 2009 and June 2012.

Again, the loans were unsecured, had no interest payable and no repayment term. At the time of the Court hearing, less than $30,000 of the loans had been repaid.

As with the Early Sunshine case, the Tax Office was alerted to the breaches by the fund’s external auditor and decided to take action because this was the second time the Ryans had used their super fund money for personal or business purposes.

The Ryans had breached the super laws between 2001 and 2004 when they “borrowed” money from their fund but the Ryan’s and the ATO formally agreed that no action would be taken if these loans were repaid. This money was repaid so the Tax Office let this matter rest.

This time, the breaches committed by the Ryans were the same as the Early Sunshine fund plus they also provided financial assistance to a fund’s members or their relatives via direct loans.

Fines

As with the Early Sunshine case, the Ryan’s could have been fined $220,000 plus costs.

In the end, the AAT imposed a fine of $20,000 on Mr & Mrs Ryan. The AAT had agreed that the Ryans should also pay the ATO’s costs but, at the time of writing, no decision had been published about this.

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