During a netwealth educational webinar on Oct 25 2016, Netwealth's Head of Technical Services, Keat Chew shares his thoughts on the 5 deadly sins of SMSFs and how they can be avoided.

1. The five deadly
sins of SMSFs
Presented by
Keat Chew, Head of Technical Services
Nigel Smith, Technical Services Consultant

2. | Netwealth The five deadly sins of SMSFs2
Disclaimer
This information has been prepared and issued by Netwealth Investments Limited (netwealth), ABN 85 090 569 109, AFSL 230975, RSE
L0000192). It contains factual information and general financial product advice only and has been prepared without taking into account
your individual objectives, financial situation or needs. The information provided is not intended to be a substitute for professional
financial product advice and you should determine its appropriateness having regard to your particular circumstances and seek any
independent financial or other professional advice you may require. The relevant disclosure document should be obtained from
netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any netwealth
product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including netwealth, or any other member of the netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.

3. | Netwealth
1. Being a bad trustee
2. Dying without a plan
3. Leaving the country
4. Borrowing blindly
5. Being greedy
The five deadly sins of SMSFs3
The five deadly sins

4. | Netwealth
Sin No.1
Being a bad
trustee
The five deadly sins of SMSFs4

5. | Netwealth
Take control, more control means more responsibilities
Easy to inadvertently breach many minor rules & become a
“bad trustee”
• Trustees ultimately responsible for meeting these rules
Bad trustee for varying reasons including
• Contravening “hard wired” rules: Sole purpose, financial
assistance
• Forgetfulness: Late accounts, missing critical dates
• Lack of knowledge: Misuse of funds, illegal structures,
triggering NALI
ATO can now apply specific “administrative penalties”
– Since 1 July 2014
Whatever the reason, same bad outcome – it costs!
• Fines & penalties, increased tax, lost opportunities – often
all together!
The five deadly sins of SMSFs5
Overview
Sin No.1, being a bad trustee

6. | Netwealth
3 regulatory directives and penalties on SMSF trustees
• Education – forced education at trustee expense
• Rectification – directed actions to resolve issues (do this
or else!)
• Administrative ($) penalties – for specific breaches &
payable by trustees
Penalties on each trustee
• 60 penalty units ($10,800#) breaching:
– the lending rules
– the borrowing rules, or
– the in-house asset rules
• 20 penalty units ($3,600) for breaching operating
standards
• 10 penalty units ($1,800) for:
– not keeping proper minutes and records,
– Fail to inform regulator/keep record of changes
in trustees
• 5 penalty units ($900) for non compliance with education
direction
# If 4 individual trustees could be $43,200 v 4 members with
corporate trustee = $10,800
## Over 70% of SMSFs (and 90% new SMSF established)
with individual trustees
The five deadly sins of SMSFs6
For our No.1 sinners…
ATO penalties

7. | Netwealth
DCT V Rodriguez (2016): Fined $40,000 (+ $14,000 costs) for
30 breaches (1)
Over a number of years
• The Trustee borrowed, repaid & then re-borrowed
• Effectively the SMSF was his personal ATM
• Attempted to disguise some of the borrowings
Caught via an ACR, the ATO & Court identified the
following contraventions
• s62 (sole purpose)
• s65 (lending) and in-house asset provisions
Relevant factors taken into account by the Court
• repetition and consistency of the contraventions
• attempt to disguise some of the borrowings, and the
• Trustee’s awareness of borrowings to be in breach of the
SIS Act
The trustee (not the fund) is liable and must pay the fine
(1) Under the Administrative Penalties could have been
30 x $10,800 = $324,000 per trustee
The five deadly sins of SMSFs7
A new benchmark for trustee fines

8. | Netwealth
Ex-executive BHP & NAB fails to pay minimum pension from
SMSF (TR2013/5)
• ATO imposes tax on $1,176,991 as ECPI exemption lost
• Result - Additional tax of $177,000
Shail’s Case
• Marriage between Mr and Mrs Shail was troubled (1992)
• 2005, Mr Shail disappeared with $3.46m withdrawn & sent
to Turkey
• No condition of release met
• Fund declared non-complying, co-trustee jointly and
severally liable
• Result - Tax bill of $1,583,873 + penalty of $1,475,322
Gylman Case (AATA 2015)
• The Friendly Fund (SMSF) had no reported profit in any
tax year 2003-2008
• 2008-2009 returns falsely disclosed an overseas property
as the only asset
• 2007-2011 fund’s bank a/c disclosed deposits of $1.6m,
withdrawals of $1.5m & deposits to personal a/c of $0.99m
• No meaningful records, early release, sole purpose +
numerous breaches!
• Result - Tax shortfall of $377,814 + penalties of $283,361
The five deadly sins of SMSFs8
Beyond administrative penalties

9. | Netwealth
SMSF lose majority of cases against ATO – (SPAA 2016)
• … of 32 cases looked at, ATO won 28 of them ….pretty
clear weight is very much in commissioner's hand, …
cards very much stacked in the commissioner's favour.”
• Avoid being spotted and confrontation with ATO
Those on ATO radar (Kasey Macfarlane, Assistant
Commissioner, SMSF Unit)
• individuals with poor personal tax lodgement histories
and no or limited income
• SMSFs with overdue annual returns
• breaches reported in auditor contravention reports that
have not been rectified
• SMSFs that have significant changes in assets and
income, outside the previous pattern of the fund and
without obvious reason
• possible non-commercial related-party investments or
transactions
• non-compliance with pension rules
• inappropriate claiming of tax deductions in pension
phase
The five deadly sins of SMSFs9
Don’t get on the ATO $@&# list!

10. | Netwealth
• Be good and be a responsible trustee
• Only do it if you are not going to be sinner no.1
• Always time to repent, ATO can be forgiving
• If you want to be a trustee, be a good one!
• Take advice and avoid being in the spotlight
The five deadly sins of SMSFs10
Final messages for sinner No.1

11. | Netwealth The five deadly sins of SMSFs11
Sin No.2
Dying without
a plan

12. | Netwealth
Death in SMSF without proper estate planning is a big sin!
What normally goes wrong
• Failure to execute a reversionary or BDBN document
• Failing to up-date as circumstances change
(divorce/marriage/death)
– LPR ≠ Successor trustee  Surviving trustee can have
full discretion outside ‘will’
• Incorrect documentation leading to invalid documents
Blended family SMSF’s are at greatest risk
Results are never good
• Member account balances going to the wrong person
• Surviving trustee ignore deceased wishes and taking
money
• A big mess and family feud- relationships being destroyed
• High legal costs consuming large portion of estate
balance
The five deadly sins of SMSFs12
Overview
Sin No.2, dying without a plan

13. | Netwealth
Facts of the case
• Husband (Augusto) and wife (Francesca), wife passed away
• No binding nomination
• Her will specifies none of her super to go to husband, but to be paid to her kids
• Kids act as executors for her estate
• Individual trustees at date of death
• Augusto resigned as individual trustee and appoint corporate trustee
• Corporate trustee (Augusto) exercise discretion to pay all to himself
The five deadly sins of SMSFs13
Failure to appoint a successor trustee
Ioppolo & Hesford v Conti (Supreme Court Australia)

14. | Netwealth
Issues and court’s findings
• Kids as executors brought action against trustee of SMSF
• Kids argued that they have right to be appointed as co trustee of fund
• Court held that although SIS allows appointment of co-trustee, no legal requirement
• Executors argued that trustee did not act in ‘bona fide’ manner
• Court rejected the argument, confirming that trustee if no binding nomination, can apply discretion and entitled to ignore
direction of the Will
Important lessons
• Non binding nomination is exactly that!
• Need to think careful about binding, non binding and reversionary and implications
The five deadly sins of SMSFs14
Ioppolo & Hesford v Conti (Supreme Court Australia)

15. | Netwealth
Summary
• Mr & (the 2nd) Mrs Morris were only members &
individual trustees
• Mr Morris died Feb 2010, with BDBN in favour of his two
daughters from first marriage
• Mrs Morris’ legal advice (poor in hindsight!) said that the
BDBN was ineffective
• The trustee (now a corporate trustee with Mrs Morris as
the sole director) used discretion to pay all of the
deceased’s benefits to (surprise!!) – herself
• Daughters objected saying BDBN was valid – long legal
battle followed
• 2013 - SC agreed BDBN valid and ordered payment to
daughters + daughters costs to be paid by the Mrs Morris
– BUT Mrs Morris had died prior to judgement & her
estate was bankrupt!
• The daughters won BUT there was a $324,000 shortfall +
costs & incidentals that unlikely to be recovered from
bankrupt estate
• Adding insult to injury – his estate was subject to a
separate action and a $1.8m estate had reduced to $200k
by the date of the hearing
The five deadly sins of SMSFs15
Legal costs mean you can win but you lose
Wooster v Morris (2010)

16. | Netwealth
Summary
• Mr Munro, a solicitor, had an SMSF with his (2nd) wife at
time of death
• Exec of his estate - his two biological daughters and Mrs
Munro#2.
• After his death, Mrs Munro’s appointed her daughter (not
related to Mr Munro) as 2nd t/tee to SMSF
• Mr Munro had made a BDBN for super to go to his Estate
(Will) to be split b/w his natural daughters and 2nd Mrs
Munro.
• The nominated beneficiary was the “trustee of (the)
deceased estate”
• 2nd Mrs Munro argued the BDBN was invalid and
trustees (Mrs M#2 & her daughter) decided to pay 100%
super to the 2nd Mrs Munro as dependent (by-passed
will)
• Mr. Munro’s natural daughters argued the BDBN was valid
and should be paid to the executors - to be dealt with by
the Will (so they would get their share)
• Court said: The nomination of ‘Trustee of Deceased
Estate’ was insufficient to direct the trustee to pay the
benefits to Mr Munro’s ‘LPR’, being his executors.
• Result: Natural daughters missed out, deceased wishes
not carried out & 2nd wife got everything!
The five deadly sins of SMSFs16
Invalid documents executed
Munro v Munro

17. | Netwealth
• It is a big sin to build up lifetime wealth to lose it on
death
• Don’t leave an estate planning mess
• Realise perhaps when your time may be up, and do
something
• Be prepared for the inevitable
• Be even more prepared if part of a blended family
• Take advice and avoid dying without a plan!
The five deadly sins of SMSFs17
Final messages for sinner No.2

18. | Netwealth The five deadly sins of SMSFs18
Sin No.3
Leaving the country

19. | Netwealth
To maintain tax concessions and avoid massive tax
penalties an SMSF must be a resident fund at all times
during the year
There are 3 tests that the fund must continuously meet
during the year
1. Fund established in Australia, or any asset of fund is
situated in Australia at that time; and
2. At that time, the central management and control of the
fund is ordinarily in Australia; and
3. At that time either the fund had no active member(#) or
at least 50% of:
– the total market value of the fund's assets attributable
to superannuation interests held by active members;
or
– the sum of the amounts that would be payable to or in
respect of active members if they voluntarily ceased to
be members;
is attributable to superannuation interests held by active
members who are Australian residents.
# An active member is essential a member who is making, or
having contributions – including rollovers - made on their
behalf.
The five deadly sins of SMSFs19
Overview
Sin No.3, leaving the country

20. | Netwealth
Test 1 – Established in Australia
• Both SMSF & Retail can pass with ease
Test 2 – Central management and control ordinarily in
Australia
• SMSF trustees overseas  high level decisions o/seas 
TEST FAILED
– 2 year period is a guideline depending on facts – don’t
assume always applicable
• Trustees must show absence is short term/defined in
advance/have a passing purpose
• SMSF trustees may be able to delegate/EPoA but give up
all control
• Retail trustees in Aust  high level decisions in Aust 
TEST PASSED
• Retail: Member investment decisions continue as normal
while overseas
Test 3 – Active member
• SMSF member contributes  active member
• If has more than 50% of fund assets  TEST FAILED
• Retail: Member contributes while overseas  becomes
active member
• Retail: Irrelevant as no way overseas member has 50%+ of
total fund assets
Retail fund allows overseas member to contribute and
manage without fear
The five deadly sins of SMSFs20
Going overseas - SMSF vs Retail
Why an SMSF is at risk when trustees move O/S but a retail fund is not

21. | Netwealth
Failure of any one of the tests at any time = notice of non-
compliance
Penalty is very high!
• 1st year: (Market Value of Fund assets – non-
concessional) x 47% (Highest MTR)
• Thereafter: Assessable income x 47% (Highest MTR)
CBNP Superannuation Fund v Commissioner of Taxation
• Mrs M established an SMSF (Corporate Trustee) and was
the only member
• 6 years later moved to NZ and ceased being an Australian
Tax resident
• This was the case for more than 2 years
• Non-residency issue discovered as a result of “in-house
asset” contravention
• ATO issued a notice of non-compliance – taxed at 45% -
trustees appealed
The court held
• Not a resident super fund at all times during the year, as
CMC was not in Australia;
• Mrs M was not 'temporarily absent from Australia'
• It was an SMSF but was not a complying fund, because it
was not a resident SF
• ATO discretion not available to a non-resident fund
Assessed on amended taxable income of $302,313
($136,040 additional tax)
The five deadly sins of SMSFs21
SMSF and overseas nightmares

22. | Netwealth
• Do not set up SMSF if there is any itch of going
overseas
• Could be unforgiveable sin, no amount of confession
may be able to help
• If already set up, going overseas requires planning
– Change to small APRA fund
– Wind up and transfer to retail fund
– Have the necessary trusteeship taken over
• Take advice and avoid a very expensive one way ticket
The five deadly sins of SMSFs22
Final messages for sinner No.3

23. | Netwealth The five deadly sins of SMSFs23
Sin No.4
Borrowing blindly

24. | Netwealth
LRBAs are best suited to SMSF
• Provides a number of opportunities to:
– Boost fund asset/performance via gearing;
– By-pass limiting contribution caps
– Greater access to lumpy high value assets – usually
real property
BUT, it can go horribly wrong very easily & not easily
rectified
• Legally complex to structure
• Gearing can be equally powerful on the downside
• Not appropriate for the fund and members
Very high on the ATO “watch list”
• The ATO is pursuing a case involving hundreds of
"bungled" LRBAs and clients wrongly advised to invest in
property – ATO Director of Super May 2015
The five deadly sins of SMSFs24
Overview
Sin No.4, borrowing blindly

25. | Netwealth
Location A/c from which
deposit should
come
Can Holding T/tee be
incorporated after
contract Signed?
Description of purchaser on
contract
Must Bare Trust be
signed before
purchase contract?
Is an agency
agreement required?
NSW SMSF's A/c No <holding T/tee> No No
QLD SMSF's A/c No <holding T/tee> YES YES
VIC
SMSF's A/c YES
<holding t/tee> ATF
<trustee of SMSF> ATF
<name of SMSF> or <t/tee
of SMSF> ATF <name of
SMSF> and/or nominee No No
The five deadly sins of SMSFs25
LRBA’s – what could possibly go wrong?
An example (different States have different documentation requirements)
Deposit paid by member personally & later characterized as contribution
• Property initially in wrong name
• Possible acquisition issues to correct as now being acquired from a member
• If you can correct, possibly 2nd round of stamp duty (CGT?) to transfer to SMSF

26. | Netwealth
Changing legislation – e.g. related party loan arrangements
interpretation
• PCG 2016/5 – LRBA Safe Harbour Guidelines
• Need to unwind prematurely
• Need to restructure
• Income received treated as NALI (Non Arms Length
Income)
– NALI taxed at highest MTR
• Possible unintended tax and stamp duty consequences
Incorrect structure – e.g. not a bare trust / multiple assets
• At best – costly legal advise to correct
• Most likely – forced to prematurely unwind arrangement
with uncertain consequences
• At worst – forced to unwind, additional stamp duty,
unplanned CGT & ATO fines
The five deadly sins of SMSFs26
LRBA’s – more that could possibly go wrong

27. | Netwealth
Not understanding the key principals – e.g. single asset/
same asset rules
• Building on vacant land = different asset = breach
• Undertake property development (strata title a big block)
= breach
• Buy different shares under single LRBA = multiple assets
= breach
• Buy single company (BHP) & need to sell some = different
asset = breach
Death with large single asset
• Reduced contributions = inadequate cash flow to
continue LRBA = forced early sale;
• Forced early sale to pay benefits to deceased
beneficiaries
– May be able to postpone problem by paying income
stream to beneficiaries
• Cross insurance no longer allowed to cover debt on
premature death
The five deadly sins of SMSFs27
LRBA’s – even more that could possibly go wrong

28. | Netwealth
• Only for those who understand gearing
– Fit the right risk profile to borrow
• If get it wrong, costly to unwind
• Specialist professional legal advice all the way
– Get it right first time
• Take advice and avoid costly borrowing!
The five deadly sins of SMSFs28
Final messages for sinner No.4

29. | Netwealth The five deadly sins of SMSFs29
Sin No.5
Don’t be greedy!

30. | Netwealth
Yes it’s your money BUT just not yet!!
Tempted to use SMSF for other purposes that may be
within letter of the law but not in the spirit of the law
The ATO has regularly taken a narrower interpretation to
stop such practices
Examples could include
• Loan to related company
• Personal use assets
• Early release of benefits
Such arrangements can fail at many different levels
• Specific sections of the law
• General provisions – “Sole purpose test”
• Related legislation provisions – Part IVA
The five deadly sins of SMSFs30
Overview
Sin No.5, don’t be greedy!

31. | Netwealth
Loans to members and related party
• SISA S65: (1) A trustee … of a regulated superannuation
fund must not lend or give financial assistance to a
member or a relative of a member of a fund;
• Does not say that a SMSF cannot lend to a company!
R Ali Super Fund (SMSF) v Commissioner of Taxation
• Trustee lent money to a company that then on lent the
money to members of the fund and businesses controlled
by the trustees
• Technically not in breach of sec 65 as money lent to a
company
CoT declared the SMSF non-complying
• Breach of Sec 65 - money lent to the company was
immediately on lent to members the ATO “looked
through” the company to ultimate use/reason for the
arrangements and deemed it financial assistance;
• Other related breaches included:
– S62 Sole purpose; S84 in-house asset limit; s109
dealing at arms length.
The five deadly sins of SMSFs31
Don’t lend to members

32. | Netwealth
Personal use assets (SISA 62A & SISR 13.18AA)
• SMSF are not prohibited form holding collectables and personal use assets BUT very strict guidelines apply
• Trustee’s applying a wider/different interpretation can lead to trouble:
– 13.18AA(3) - prohibits SMSF trustees from storing collectables and personal use assets in the private residence of
related parties
– What about storing them in a related party business premises – hang paintings on the boardroom wall all properly
insured, alarmed, climate controlled etc.?
ATO’s interpretation
• You can store (but not display) in premises owned by a related party that is not their private residence - artwork can’t be
hung where it is visible to clients and employees.
The five deadly sins of SMSFs32
Don’t enjoy your personal assets

33. | Netwealth
Early release of member benefits is illegal
Must meet a condition of release before accessing your super
• Few exceptions with strict conditions & small amounts (Financial Hardship/Compassionate)
Heavy penalties apply to members & trustees & promoters (includes financial planners)
• No deduction for any fee/commission a promoter takes from your super
• Illegally accessed super is included in your taxable income, even if returned to fund
• SMSF trustees can also incur higher taxes, additional penalties, & disqualification
• Trustees may also incur a fine of up to $340,000 and a jail term of up to five years or fines of up to $1.1 million for corporate
trustees
• Promoters face civil & criminal penalties with some already jailed
The five deadly sins of SMSFs33
Don’t get your money early

34. | Netwealth
Facts
• Vuong, aged 49 & a member of the Equipsuper fund
• Vuong met Phuong who said he could be paid his super
early subject to a 29% fee
• Vuong signed blank form and roll-over to Nguyen SMSF
• Equipsuper paid $114,697 by cheque to Nguyen SMSF
(fraudulently used by Phuong)
• Vuong subsequently received $81,434 in a series of
payments ($114,697 net of fee)
• Vuong ran this past his tax agent in relation to the
preparation of his FY2009 tax return who ‘smelled a rat’
saying it was improbable it would be super
In July 2011, the ATO undertook an audit
Result was that the ATO imposed
• $45,300 primary tax on total $114,697 withdrawal
• $11,325 fine being a 25% administrative penalty (Later
remitted by AAT on appeal)
• $2,900 in shortfall interest charge (Later remitted by AAT
on appeal)
The five deadly sins of SMSFs34
A greedy sinner
Vuong and FCT

35. | Netwealth
• There is a price for tax concessions
• Got to do your time
• If you are easily tempted, don’t have one
• Take advice and avoid being a sinner
The five deadly sins of SMSFs35
Final messages for sinner No.5

36. Contact
Thank you
Keat Chew
Head of Technical Services
1800 555 223
keat@netwealth.com.au
Nigel Smith
Technical Services Consultant
1800 555 223
nigel@netwealth.com.au

37. | Netwealth The five deadly sins of SMSFs37
Disclaimer
This information has been prepared and issued by Netwealth Investments Limited (netwealth), ABN 85 090 569 109, AFSL 230975, RSE
L0000192). It contains factual information and general financial product advice only and has been prepared without taking into account
your individual objectives, financial situation or needs. The information provided is not intended to be a substitute for professional
financial product advice and you should determine its appropriateness having regard to your particular circumstances and seek any
independent financial or other professional advice you may require. The relevant disclosure document should be obtained from
netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any netwealth
product.
While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person,
including netwealth, or any other member of the netwealth group of companies, accepts responsibility for any loss suffered by any
person arising from reliance on this information.