A journal entry is insufficient action to authorise the transfer of money from one member of an SMSF to another and any such movement must be carried outexpert has stated
Heffron senior SMSF education specialist Natasha Panagis said there appeared to be scenarios where a journal entry may suffice, but in reality there was no provision in law where they can be used, regardless of the relationship between the members.
Panagis gave the example of two members, sisters aged 65 and 60, who are both members of the same SMSF, with the older sibling having a pension and accumulation account and the younger one only having an accumulation account.
The older sister plans to transfer $100,000 from her pension account to the younger one’s accumulation account, since she is over 65 and can take a member benefit, and will treat the transfer as a non-concessional contribution. The funds will not leave the SMSF bank account, so there will be no withdrawal or redeposit of any cash with the transaction marked only by a journal entry.
“We know the super and tax rules allow for lump sum withdrawals and voluntary contributions to occur cash or in specie,” Panagis said in a webinar today.
“Yet in order to do a withdrawal and recontribution strategy, and for that to be effective, there needs to be an actual withdrawal of cash or assets from the fund, followed by an actual contribution of cash or in-specie assets back into the fund.
“That means a mere journal entry, which only records this process without any movement of cash or assets, won’t be sufficient.
“We don’t have a genuine withdrawal and a genuine recontribution. The ATO is going to take the view that the transaction hasn’t taken place.”
She pointed out the regulator had set out its view in Taxation Ruling 2010/1, which states a contribution was anything of value that increased the capital of the fund and specifically noted any internal reallocation between members using accounting journal entries did not establish a payment.
“In principle, if no new value enters the fund, there is no contribution,” she added, also highlighting the same rules applied for death benefits.
“The same situation applies if we’re paying out death benefits. We can’t just simply transfer the deceased member’s balance to the surviving member’s account by way of journal entry. That’s not how the compulsory cashing rules work.
“We have to take it out, do a compulsory cashing either as a lump sum or as a pension, and not just use journal entries.”
