A trustee came to me to ask about binding death benefit nominations.
As an SMSF specialist, I asked for the structure of their SMSF and was presented with a copy of the deed and the financials.
The trustee is quite savvy and has a Limited Recourse Borrowing Arrangement (LRBA) within the fund. Out of curiosity I asked what interest rate was being charged; the rate they were using was from 2 years ago.
I explained that the rate needed to be updated every year and that based on this that they had underpaid their interest for the past 2 years.
I explained that the issue here could be that the difference could be viewed as a personal contribution; and as the client does not meet the work test, this could be an issue.
Of a major concern however, was the fact that any income into the fund could be treated as non arm’s length with the possibility of being tax at 45%, as well as breaching a number of other issues including the failure to meet the safe harbor provisions.
The issue had not been picked up by the accountant or the auditor for 2 years.
Together with the trustee we called the accountant to ask how they would like the issues treated.
The accountant tried to deflect and say this was the trustee’s fault. I explained that as the administrator, I would suggest that he also had an obligation to check that the correct interest was being charged and that this should also have been picked up by the auditor.
The comment was met with silence.
With the trustee, we explained the situation, rectified the issue and now have a complying fund once again.
Both trustees, accountants and auditors need to be fully aware of their obligations and liabilities. If you have doubts about any compliance issues, consult a financial planner who is an SMSF specialist. If you’re unsure whether your SMSF is fully compliant, don’t wait for the ATO to find the issue; get a specialist review today.