Why self-managed super funds face $6,000 penalties for breaking complex tax rules

Tradies, real estate agents and accountants with self-managed super funds face being slugged thousands of dollars in penalties if they accidentally breach complex tax rules banning DIY work on their retirement savings or assets.

Strict rules banning ‘non-arm’s length transactions’ were introduced in July 2018 to prevent self-managed funds buying or renting out assets at below market value.

The rules prevent, for example, a property owned by a self-managed fund to be rented out at mates rates to a relative of the trustee.

But accountancy groups warn the rules are so complex anyone with a self-managed fund who applies ‘their professional or trade skills to their personal lives’ could be penalised.

They argue breaches could include using a work laptop to complete personal tasks or an accountant doing their self-managed fund tax return without charging for it.

A real estate agent who sold an investment property owned within their super fund could be in trouble for not charging commission. 

And so could a tradie who renovated an investment property and didn’t bill their self-managed fund.

Under the ‘arms-length’ rules, someone with a typical super balance earning close to an average salary could be slugged $6,000 in tax penalties if they did work for free. 

Average-income Australians with a self-managed super fund face being slugged with $6,000 in penalties if they accidently breach complex tax rules, accountants say (pictured are Sydney construction workers)

Assistant Treasurer Stephen Jones was urged to change the rules regarding Australia’s 600,000 self-managed funds as he addressed the SMSF Conference in Melbourne on Thursday. 

CPA Australia, Chartered Accountants Australia and New Zealand, Institute of Financial Professionals Australia, Institute of Public Accountants, National Tax & Accountants’ Association, SMSF Association and The Tax Institute released a joint statement condemning the rules.

‘Hardworking Australians could take a hit to their super simply by applying their professional or trade skills to their personal lives due to complex restrictions on non-arm’s length transactions,’ they said. 

‘Professionals and skilled tradies are not trying to circumvent the rules. It is simply easier and often makes financial sense to DIY these tasks.’ 

The accountants cited the case of someone having $135,000 in super and earning $90,000 a year, which is slightly below the average super balance of $145,388 and the average-full-time salary of $94,000.

Someone in this position risked $6,000 in tax penalties for accidentally breaking the rules.

Accountants argue some of the ‘arms length’ rules are so complex an Australian with a typical super balance earning close to an average salary stood to be slugged $6,000 in tax penalties (pictured is a stock image)

Assistant Treasurer Stephen Jones was lobbied to change the rules regarding Australia’s 600,000 self-managed funds as he addressed the SMSF Conference in Melbourne on Thursday

Mr Jones noted in his speech there were more than 600,000 self-managed super funds holding $870billion worth of assets.

Australia is home to 16million superannuation accounts collectively worth $3.3trillion.

‘That’s a lot of money. It is an Australian story that we can be proud of,’ Mr Jones said.

‘But no public policy can or should be “set and forget”.’

He also reiterated Labor’s call for super funds to invest in projects that aligned with the federal government’s key priorities.

‘The funds want to do it. They want to work in partnership with government to invest in things like infrastructure, whether it’s roads, whether it’s rail, whether it’s ports, whether it’s airports, whether it’s health infrastructure or aged care,’ he said.

‘They want to do it. Many of them are already doing it. We want to lift that up and ensure we can do it in partnership and ensure we can remove some of the friction out of the process.’

Self-managed super funds can be used to buy a residential investment property, provided its not rented out to a relative.

H&R Block’s director of tax communications Mark Chapman said the rules were strict.

‘So, buying a holiday home in your SMSF and living there during the summer isn’t allowed,’ he told Daily Mail Australia.

Small businesses can also buy a commercial property but the rent must be paid back into the self-managed fund at market rates, with the funds saved up for retirement. 

Australians with a self-managed super fund have until February 28 to lodge their annual return for the previous financial year but can get an extension to May 15 if they used a tax agent.