….. to members and the rule that super funds must be maintained for the sole purpose of providing retirement and death benefits.

These provisions are often indelibly linked. When an SMSF makes a loan or provides other financial assistance to members or their relatives, the sole purpose test is also being breached.

The central theme that brings the two together, of course, is that superannuation is not intended to provide pre-retirement financial advantages to members.

The Super & Financial Services News Alert, published by Thomson Reuters, reports that the tax office - in its role as regulator of self-managed super - is expected to release some additions to its rulings on giving financial assistance and on the application of the sole-purpose test. (See the current rulings: financial assistance and the sole-purpose tes t.)

These changes to the rulings are likely to be just a little fine-tuning to some of the words. However, Smart Investing doesn't need much of an excuse to remind SMSFs of the importance of these provisions.

In an address to a conference in Melbourne this month, assistant commissioner for superannuation Stuart Forsyth, said: "It is no secret that SMSFs are a growing market. What might surprise you is how quickly they're growing".

Forsyth points out that there were 187,000 SMSFs in existence 13 years ago when the tax office took over their regulation from APRA. At last count, there are 488,000 SMSFs - an increase of 161%."

The growing number of SMSFs underlines the need for the trustees running these funds to understand their responsibilities and obligations," Forsyth told his audience.

For years, the tax office has regularly warned SMSF trustees not to breach the provisions regarding financial help to members and the sole-purpose test.

For instance in March 2007, tax commissioner of taxation Michael D'Ascenzo, named making loans to members and breaching the sole-purpose test as among the six most common SMSF contraventions reported to the ATO. Indeed, he placed the making of loans to members or their relatives at top of his list. (See Making superannuation simpler )

And the latest SMSF News , published by the ATO, makes a strong warning about the heavy penalties if SMSFs are caught making loans to members.

The ATO has the power to strip a fund of its complying status for such breaches. The market value of a non-complying SMSF, less non-concessional contributions, is taxed at the highest marginal rate. That's a heavy penalty that affects all members of an SMSF.

By Robin Bowerman
Smart Investing Principal & Head of Retail, Vanguard Investments Australia
20th November 2012