The recent bushfires across Australia have impacted many thousands of individuals and small businesses and prompted an outpouring of generosity at levels never before seen in this country. We’ve since had multiple inquiries from clients whose SMSF has been negatively affected or who’d like to use their SMSF monies to help others.
In this article we cover how to help others using SMSF monies, aimed not just at the recent bushfires but any national disaster across the country.
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For those clients who’ve not been impacted and would like to help others less fortunate, can their SMSF play a role? Unfortunately, the answer is usually “no”.
All superannuation funds are required to comply with the sole purpose test [SIS s.62]. That is, the fund needs to be maintained only for the purpose of providing benefits to members on their retirement, or for their dependants, in the case of members who die before. Sadly, there is little opportunity for altruism in the sole purpose test.
Can an SMSF make a charitable donation?
In our view, an SMSF making a charitable donation would breach the sole purpose test as it would be difficult to argue that there was a retirement purpose behind the transaction.
You may then wonder how public offer funds are able to do so. For them, the argument is slightly different.
Making a (often publicised) donation to charity, sponsoring a sporting team or offering incentives to particular groups raises awareness of the fund’s brand, encouraging new members which in turn reduces the administration costs for all members. The amount of the donation is usually at such a low level relative to the total asses of the fund that member returns are not impacted. A similar approach was taken by AustralianSuper recently with Qantas’ offer of bonus frequent flyer points for new fund members.
Of course, those SMSF members whose benefits are unrestricted non-preserved (eg reached age 65, over preservation age and met a retirement definition, or satisfied some other condition of release allowing access to their benefits) could draw on those benefits and make a personal donation with the proceeds.
On a similar note, on the death of a member, can their benefits be paid to a charity?
Not directly. Superannuation benefits may only be paid to the member’s dependants or their legal personal representative (ie their estate) [SIS Reg 6.22]. Where benefits are paid to the member’s estate, they could then be paid to charity in accordance with the member’s will.
My client’s SMSF owns residential property. Can they lease the property to those who’ve lost their homes at a nominal rate?
If the property is located in an area where there is a shortage of rental properties, there is likely to be greater demand which could put upwards pressure on prices. For the SMSF to then lease their property at a nominal rate suggests there is a non-retirement purpose behind the transaction.
However, if the property is currently untenanted and the trustees do not believe they will be able to secure long-term tenants on favourable terms now given the damage to infrastructure in the area etc, then they may in fact be making a tactical decision which will lead to higher retirement benefits in the longer term. For example, they may consider having a tenant in the property at a reduced rate is better than no rent at all, and that they’ll then have the opportunity to lock in a higher rate when conditions improve. They could even potentially argue that no rent is reasonable if there is significant value in having “someone” in the property at a time when the area is less stable than normal.
In this case, the rent would not be considered nominal, but in fact simply a reduced rate to reflect the current circumstances. It would be important in this situation to have those considerations documented by the trustee.
The acid test will always be - is this simply a generous act or can it be supported as the prudent management of the fund’s assets in order to maximise retirement benefits? Imagine it was someone else’s money/assets you were dealing with – would you do it or would you feel that was something you could only really justify if it was your own money?
Where superannuation is concerned, particularly SMSFs, it is always important to double-check the rules before taking action. Often the law simply doesn’t allow for the outcome trustees and members desire. If you have other questions for us to consider, let us know so that we can cover more scenarios in future articles.
This article first appeared in Heffron's Super Insights newsletter. It details the latest changes in superannuation legislation, commonly asked questions and answers, and other SMSF related news. It is available to members only. If you want to be the first one to learn about technical updates join our technical support membership.
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