A recent Federal Court case underlines the potentially destructive consequences when the assets of a family’s self-managed super fund are used in an attempt to save a family’s struggling small business.
The trustee of the super fund in this case made six back-to-back loans totalling $190,000 to his brother-in-law who immediately transferred the money to the trustee’s Sunshine Coast convenience store.
A high price is being paid by the SMSF’s two members – Anthony Shaune Lyons and his wife, Julianne Marie – for the decision to use their super money as working capital for their financially-troubled business:
- Their savings in the SMSF have been lost. None of the superannuation injected into their family business has been repaid and is, according to the court, irrecoverable. (The $190,000 in loans represented almost all of the super fund’s $193,000 in assets.)
- The court has personally fined the trustee Anthony Shaune Lyons $32,500 plus $5000 towards costs for contravening a range of the most fundamental laws including the bar on providing financial assistance to members or their relatives.
- By using their SMSF assets to prop up their failing business, the couple lost the protection of superannuation as a means to quarantine their super savings from the fate of their convenience store. Superannuation is widely regarded as an effective means for small business operators to gain asset-protection subject to certain conditions.
The couple is now bankrupt because of personal debts incurred in running their business. Their plight is setout in stark detail in the court’s judgment, Deputy Commissioner of Taxation (Superannuation) v Anthony Shaune Lyons.
Peter Crump, superannuation strategist for ipac South Australia, is emphatically against business owners using their super savings to try to save their financially-troubled businesses.
Crump, who is chairman of the SMSF Professionals’ Association of Australia, says owners of small businesses that are experiencing difficulties may tend to look at their business’s chances of recovering with “very rose-coloured” glasses.
“They may say to themselves, ‘I only need to put in a little more money to see the business through’. It is in a similar vein to gambling,” Crump believes.
The sad experience of the business couple in this court case highlights why SME business owners should:
1. Not overlook the excellent asset-protection qualities of superannuation: Assets held in a super fund are generally inaccessible to trustees in bankruptcy – provided contributions were not made with the main purpose of defeating creditors.
“By moving savings outside super,” says Crump, “you are exposing those savings. Keeping super and business assets separate is one of the key advantages of superannuation.”
2. Know when to quit a failing business and understand the need for quality professional advice: Rather than chasing good money after bad in a failing business, Crump says business owners should listen to expert and independent professional advice about when to quit.
“You should have advisers with the courage and conviction to tell you when to quit a business,” he stresses.
3. Never overlook the fundamental laws of super: The trustee in this court case contravened the most basic laws of super.
The trustee breached the sole-purpose test (a super fund must be maintained to provide retirement benefits); the ban on providing financial assistance or loans to fund members and their relatives; the in-house asset rule (with a few exceptions, super funds are prohibited from making loans or having investments with related parties and entities that exceed 5% of its total asset value); and the requirement that transactions must be conducted on an arm’s length basis.
4. Recognise the “certainty of detection” for illegal payments from a super fund: Crump says a superannuation auditor conducting the compulsory annual audit of a super fund will inevitably detect and ask for an explanation about such transactions as loans to members or their relatives.