Sharp rise in SMSF borrowing breaches

While the number of SMSFs requiring a contravention report to be lodged with the ATO has fallen over the past year - and consistently over the past seven years - there has been a noticeable increase in breaches arising from borrowings, according to the latest Partners Wealth Group research.

Of the 5 per cent of funds in breach last year, a substantial 23 per cent came from SMSFs contravening borrowing requirements, 11 per cent up on last year.

Now in its seventh year, the Partners Wealth Group annual research is based on over 600 funds across Australia audited during 2014.

Commenting on the spike in borrowings breaches, Partners Wealth Group director of SMSF consulting and auditing, Martin Murden, attributes it to a misunderstanding of the rules.

“An SMSF is allowed at law to borrow under limited circumstances in order to pay benefits, settle on investments and, with changes to legislation in 2007, acquire investments via a limited recourse borrowing arrangement (LRBA),” Mr Murden said.

“The first two borrowing options are restricted to 10 per cent of the fund's value, with borrowing terms of 90 days and 7 days respectively,” he said.

“Because borrowing via a LRBA is relatively new and has been subjected to several rule changes since inception, my suspicion is that there has been confusion, resulting in some SMSF trustees thinking it was permissible to use their fund to borrow to overcome a short-term liquidity problem - much like a small business seeking a temporary extension to a bank overdraft in difficult circumstances.”

However, only one of the SMSFs in breach of taking loans related to a fund acquiring property via an LRBA.

Two other key areas of transgression highlighted by the Partners’ research came from funds taking personal loans for members (23 per cent of funds) and funds breaching the in-house assets rule (20 per cent).

However, despite these breaches, these figures are well down on last year when they were 32 per cent and 36 per cent respectively.

"Periodically, [breaches] occur by mistake,” Mr Murden said. “For example, using the wrong chequebook [that of the SMSF] to pay a personal expense.

“On other occasions, members are simply in need of money and there is no-one to stop them from borrowing from the fund.”

The average fund size in the sample group was $1.02 million, well up on $784,000 seven years ago.

The research recorded a spike in share and listed trusts over the past year, with drops in fixed interest, cash and managed funds.

Meanwhile, property investment has remained relatively stable.