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Self Managed Super Fund (SMSF) Article
Fears of fraud prompt crackdown on fund transfers

By Tony Negline.

This article may be out of date.

24th March 2010

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Anyone wishing to transfer money already in the super system to a newly established Self Managed Super Fund must factor in a new interim status developed by the ATO.

Normally super funds are either have a "complying" or "non-complying" status.

Super funds are only allowed to transfer money to funds which the super regulators have not declared to be non-complying super funds and severe penalties can apply if such a transfer occurs.

The reason for their restriction is that the non-complying status is generally handed out when a super fund regulator has decided that the super fund has behaved in an unacceptable manner and those involved need to be severely punished.

To help complying super funds ensure that they don't accidentally move money to a non-complying super fund the ATO provides a list of all complying super funds called the ATO's Super Fund Lookup – or SFLU.

Super funds can assume that they can transfer money to any fund listed on the SFLU as a complying super fund.

In reality very little money is moved to non-complying funds and on the whole this system works pretty well.

The major exception is a few people who use Self Managed Super Funds to illegally remove their retirement savings from the super system before they have satisfied one of the Conditions of Release definitions – such as retirement and permanent disablement.

How is this achieved?  The first step is to establish a small super fund.  Part of the process of creating this fund involves opening a bank account which is in the name of the trustees.

Once the fund has been created and it's listed on the ATO's SFLU register, the people involved then arrange to have their super fund monies transferred to this new fund.  Once these monies have been deposited into the super fund's bank account they then illegally withdraw the proceeds.

Some fraudsters have used this process to steel money from unsuspecting investors.

To combat the problem of illegal early release the ATO has created a new designation called "Registered – status not determined" for its SFLU register.  It will apply to all newly established Self Managed Super Funds.

This new status will only typically be updated when a super fund lodges its first annual return and the fund is declared by the Tax Office as complying or non-complying with the super laws.

Does this mean that superannuation money cannot be transferred into a "Registered – status not determined" super fund?

Each large super fund trustee will make up their own mind how they will react but it is reasonable to assume that some super fund trustees will be reluctant, and may even refuse, to transfer money to Self Managed Super Funds that have this new designation.

In a letter to trustees that they regulate APRA told them to perform additional checks on super funds with this new status.  For example APRA suggested that one job trustees could consider carefully checking the identity of the individual seeking the transfer to confirm they're the super fund members.

It would be unfortunate if some large super funds elected not to transfer money into newly established Self Managed Super Funds with this new designation.

This new registration process is the first of two changes the ATO are making to the set-up of new super funds.  The second phase involves the ATO changing how small super funds are registered with it.  We are still waiting for further information as to what this means.

If these new rules see less mischief taking place with small super funds then these changes are a worthwhile measure.  But if it permanently stops or delays many legitimate transfers into new SMSFs then it will have cracked the walnut with a sledgehammer.

You can look at the ATO's Super Fund Lookup register at the ABN website – www.abn.business.gov.au

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