Bank accounts are essential for a self managed superannuation fund (SMSF). For example, an SMSF typically requires a bank account to accept receipts including contributions and rollovers and pay expenses and benefits. However, many SMSF trustees fail to realise that some bank accounts are riskier than others.
This article outlines the importance of preventing a bank account from going into overdraft when an SMSF is involved.
Prohibitions against borrowing — SMSF bank accounts
Using a standard bank account for an SMSF can pose a potential risk if it enters into an overdraft situation, eg, if withdrawals exceed available funds in the account, this may result in a borrowing.
Indeed, in SMSFR 2009/2 the ATO states:
- Examples of transactions or circumstances that are a ‘borrowing’ based on common terms and conditions include, but are not limited to:
-
- a loan of money, whether secured or unsecured;
- … ; and
- a bank overdraft once drawn upon.
While the detailed terms and conditions relating to each bank account should be considered, the ATO considers a bank overdraft to amount to a borrowing.
Section 67 of the Superannuation Industry (Supervision) Act 1993 (SISA) prohibits an SMSF from borrowing money except for limited circumstances (eg, via a limited recourse borrowing arrangement under s 67A).
If an SMSF borrows money in contravention of s 67 (eg, the SMSF’s bank account enters overdraft) the ATO could, among other things, seek to impose an administrative penalty. The prescribed penalty for contravening s 67 is 60 penalty units (see s 166). A $330 penalty unit applies from 1 July 2024 (a penalty unit for the year ending 30 June 2024 is $313). Thus, an SMSF going into overdraft may result in a penalty of $19,800 (ie, 60 x $330) from 1 July 2024.
Even though most SMSFs may not intend to go into overdraft, an overdraft may arise by oversight through not closely monitoring the bank account balance when making payments. One method of minimising this risk is to have the bank prevent an overdraft ever arising. This typically needs to be initiated by the SMSF trustee as many bank accounts facilitate an overdraft without even asking. Thus, this facility needs to be turned off. Therefore, check with your bank and consider seeking confirmation that the SMSF’s bank account(s) will never go into overdraft.
In-house asset rules — Unit trust bank accounts
Overdrafts can cause further issues for trustees where the fund has invested in a unit trust that is required to comply with the criteria in division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) (often referred to as a ‘non-geared unit trust’).
In the case of a non-geared unit trust that has a bank account that goes into overdraft, the unit trust may no longer satisfy the criteria in regulation 13.22C which requires the unit trust to ‘not hav[e] outstanding borrowings’. As a consequence of such a unit trust going into overdraft, the units in that unit trust become an in-house asset of the SMSF at the end of the relevant financial year and appropriate action must be taken to ensure compliance with the in-house asset test.
As noted above, one method to minimise this risk is to notify the bank to preclude any overdraft facility.
Conclusion
In conclusion, overdrafts may contravene borrowing prohibitions under SISA s 67 or jeopardize compliance with in-house asset rules, potentially necessitating costly outcomes and asset disposals to ensure ongoing compliance.
Trustees should closely manage each bank account to avoid these types of oversights or mishaps.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licensed financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents regular SMSF Online Updates. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit
By Cassandra Hurley, Lawyer ([email protected]) and Daniel Butler, Director ([email protected]).
DBA LAWYERS
1 May 2024
