“For example, an SMSF typically requires a bank account to accept receipts including contributions and rollovers and pay expenses and benefits,” she said.

“But if the withdrawals from a standard bank account exceed available funds in the account, this may result in a borrowing.”

Hurley said in SMSFR 2009/2 the ATO states “examples of transactions or circumstances that are a ‘borrowing’ based on common terms and conditions include, but are not limited to, a loan of money, whether secured or unsecured and a bank overdraft once drawn upon”.

“While the detailed terms and conditions relating to each bank account should be considered, the ATO considers a bank overdraft to amount to a borrowing,” Hurley said.

“Section 67 of the Superannuation Industry (Supervision) Act 1993 (SISA) prohibits an SMSF from borrowing money except for limited circumstances such as via a limited recourse borrowing arrangement.”

Moreover, Hurley explained that if an SMSF breaches s 67 by borrowing funds, such as its bank account going into overdraft, the ATO might enforce an administrative penalty. Starting from 1 July 2024, the prescribed penalty for contravening s 67 amounts to 60 penalty units, each valued at $330.

As such, an SMSF going into overdraft may result in a penalty of $19,800, that is 60 x $330 from 1 July 2024.

“Even though most SMSFs may not intend to go into overdraft, an overdraft may arise by oversight through not closely monitoring the bank account balance when making payments,” Hurley said.

“One method of minimising this risk is to have the bank prevent an overdraft ever arising. This typically needs to be initiated by the SMSF trustee as many bank accounts facilitate an overdraft without even asking so this facility needs to be turned off. Trustees should check with their bank and consider seeking confirmation that the SMSF’s bank account(s) will never go into overdraft.”

Hurley continued that overdrafts can cause further issues for trustees where the fund has invested in a unit trust that is required to comply with the criteria in division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR), often referred to as a ‘non-geared unit trust’.

“In the case of a non-geared unit trust that has a bank account that goes into overdraft, the unit trust may no longer satisfy the criteria in regulation 13.22C which requires the unit trust to ‘not hav[e] outstanding borrowings’,” she said.

“As a consequence of such a unit trust going into overdraft, the units in that unit trust become an in-house asset of the SMSF at the end of the relevant financial year and appropriate action must be taken to ensure compliance with the in-house asset test.”

She added, that like preventing a bank account overdraft, one method to minimise this risk is to notify the bank to preclude any overdraft facility.