The dangers of maintaining a suspense account in an SMSF

Coronica Part 1

It's not often we have a Court or Tribunal decision on the making of an SMSF non-compliant so therefore the recent decision of Coronica and Commissioner of Taxation (Taxation) [2021] assumed instant must-read status.

The primary issue before the Tribunal was whether the Notice of non-compliance for the 2009 financial year should be set aside.  After a 5 day hearing and a lengthy deliberation, the AAT upheld the decision of the Commissioner of Taxation to make the SMSF non-complying.

This case is very interesting because it covers a lot of SIS issues including:

• The valuation of assets
• The sole purpose test (section 62)
• Acquisition of assets from related parties (section 66)
• In-house assets (sections 82-85)
• Division 13.3A in-house asset exceptions
• Part 8 associates (section 70B)
• Accounting records (section 35A)
• Loans to members (section 65)
• The allocation of contributions
• The use of a member 'suspense account'
• The contents of the fund's trust deed.

Also of particular note is that the sole member of the fund is an accountant who has been in business since 1970 and finally, the decision even referenced income generated from some livestock purportedly held by the fund….so this case certainly had a bit of everything!

There were two pivotal factual matters the case explored.  The first was an acquisition of shares in a related company from the member; and the second was the operation of the SMSF and its accounting practices.  I will look further at the latter issue.

The 'Suspense Account'

Mr Coronica maintained what he called a 'suspense account' in which all the transactions between himself and the SMSF were recorded.  He explained its operation as follows:

On a regular or yearly basis, I work out the balance of the suspense account. If I have given the fund more value than it has paid to me, the balance is my contribution to the fund for the year.

I usually treat the contribution as a concessional contribution up to the relevant cap. The balance is a non-concessional contribution. I don't treat any of the balance as anything else.

The problem was that Mr Coronica didn't take this approach with the balance of the suspense account and was effectively left at the end of each year with either a debit or credit loan with himself.  It was found that he often took money from the fund before transferring assets at the end of the year to reimburse the fund.

The Tribunal emphasised that the major root cause of the fund’s compliance problems especially in the 2009 and 2012 financial years was the sustained practice of Mr Coronica banking receipts of the Fund in his personal account in contravention to the covenant in section 52 of the SISA and clause 12 of the Trust Deed.  The ATO's view of the SMSF and its 'suspense account' was the Fund was used "as an ongoing source of finance for Mr Coronica."  The Tribunal found that it wasn't a suspense account but instead was a loan account.

Key takeaways

1. The trustee must adopt a strict approach to keeping the money and assets of the fund separate from those of the trustee personally.
2. Any expenses paid on behalf of the fund should be promptly reimbursed, or treated as a contribution.

We still see too many SMSFs where money is incorrectly going in and out of the fund and the transactions are journaled to a suspense account.  The suspense account is then cleared by a transfer of money to the party which has the debit, or by the recording of a net contribution or pension, depending on whether the suspense account is in debit or credit.  This practice is not appropriate and can lead to serious compliance outcomes and penalties.

For truly independent auditor advice, please give Baumgartner Super a call on 1300 04 SMSF (1300 047 673) Australia-wide to learn more about our audit services.