ATO Warning Regarding ‘Prohibited SMSF Loans’

SMSF trustees should remember that they cannot loan money or provide other forms of financial assistance to a member or relative and, if they do, they can incur a penalty of up to $18,780. They may also be disqualified as a trustee, which means their name would be published online and they would no longer be able to operate their SMSF or another SMSF in the future.

Despite this, loans to members continue to be the highest reported contravention of the superannuation laws that the ATO sees in auditor contravention reports lodged by SMSF auditors (comprising 16% of all reported breaches for the 2019 to 2022 audit years).

An SMSF trustee also cannot loan money to a related party, such as a business, where the value of the loan exceeds 5% of the value of the fund’s total assets. This is a prohibited in- house asset investment which is a contravention of the superannuation laws.

If the SMSF’s in-house assets exceed 5% of the total value of its assets at the end of the financial year, the trustee must prepare a plan to reduce their in-house assets to less than 5%. The plan must be prepared and implemented by the end of the following financial year, and failure to do so will result in a contravention of the superannuation laws.

If a trustee has made a prohibited loan from their SMSF, it must be rectified as soon as possible by ensuring the loan is repaid.

If the trustee cannot rectify the breach, they should refer to ‘SMSF early engagement and voluntary disclosure service’ on the ATO’s website, in order to engage with the ATO early. If they do this before the ATO starts an audit and takes compliance action, the ATO will take their disclosure into account in determining what other actions they need to take.