Your SMSF is non-compliant: now what?

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If your Self-Managed Super Fund (SMSF) becomes non-compliant, don’t panic. But you do need to act. How the Australian Taxation Office (ATO) deals with you depends on the problem and the way the trustee responds. 

The ATO, regulator of SMSFs, said in an email to the writer that each year it receives reports showing approximately 2 per cent of SMSFs are contravening the regulatory provisions of the Superannuation Industry Supervision (SIS) Act.

Some of these reports to the ATO come from voluntary disclosures by SMSF trustees or their tax agents, some are from auditor contravention reports submitted by independent SMSF auditors, while the remainder are third-party referrals from a range of internal and external sources.

Common areas of non-compliance

One regular contravention is not lodging the fund’s annual return on time. “This is one of the most important obligations for trustees. The lodgement of the annual return is fundamental to us being able to monitor the health and integrity of the sector” explains an ATO spokesperson.

“Failing to lodge the SMSF annual return means the ATO has no visibility of member account details such as the total super balance and transfer balance cap and the income tax and regulatory affairs of the SMSF.”

Providing financial assistance to fund members is another area of concern. “This may occur in the form of loans to a member, which is not allowed. Or, money is simply withdrawn from the SMSF and used by the member for their personal use without meeting a condition of release.”

Non-compliance also occurs when trustees do not understand the investment restrictions on acquiring assets. Not keeping the SMSF’s assets separate from your personal assets is also a compliance red flag.

How the ATO deals with compliance fails

The regulator has a number of tools at its disposal for deterring and addressing non-compliance, including education and rectification directions, administrative penalties, disqualification of a trustee and issuing a notice of non-compliance. It can also freeze the fund’s assets if there is a risk of members’ benefits being eroded.

Trustees often find the ATO uses a combination of these tools, such as requiring them to undertake education, pay an administrative penalty and rectify the contravention.

“Based on the available facts, we risk assess all reported contraventions and determine our compliance approach1. This may be writing directly to the trustees to educate and instruct them on their next steps, or we may initiate an investigation via a review or audit” the spokesperson says.

“If a trustee voluntarily discloses unrectified contraventions before we commence an audit, their disclosure will be taken into account in determining the enforcement action we take and the appropriate level of remission of administrative penalties that may apply.”

Directions and penalties

If the contravention is due to a lack of knowledge or understanding, the ATO may require trustees to undertake approved education courses and provide evidence of completion.

When it imposes an administrative penalty, there is a sliding scale of penalties (measured in penalty units) based on the seriousness of the breach. The minimum penalty is currently AUD$1,050; the maximum is AUD$12,6002. A penalty unit for an infringement that occurred on or after July 1, 2017 is currently AUD$2103.

It’s worth noting administrative penalties apply to each trustee and cannot be reimbursed from the fund, so you are required to pay the cost yourself.

Where trustees are engaged and willing to comply, the ATO’s preference is to help rectify and return the SMSF to compliance. “If a contravention remains unrectified we may accept an undertaking given by the trustee in regards to the actions they will take to fix the problem or we may direct the trustee on specific actions we require them to take.”

Getting tough with trustees

If rectification is not appropriate or possible due to behaviour or attitude, the ATO is prepared to take tougher enforcement action, including disqualifying trustees.

Civil and criminal penalties may also be imposed. The level depends on whether the breach was reckless or intentional.

For serious breaches, according to SMSF consultant SuperConcepts, trustees could face imprisonment for a maximum term of between 12 months and two years4. The ATO says that promoting a scheme that results in super benefits being accessed illegally can also result in civil and criminal penalties5.

A last resort action by the ATO is to remove the SMSF’s concessional tax treatment by declaring it non-compliant. As this results in the fund’s tax rate rising to the top marginal rate, it is normally only imposed where there have been numerous serious breaches in which all the trustees were directly or indirectly involved.

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Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only. The Australian Taxation Office is an external entity that is not a member of the Commonwealth Bank of Australia Group of Companies (the Group) and the content or any view expressed by The Australian Taxation Office and its employees does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. CBA, nor members of the Group accept any liability for losses or damage arising from any reliance on external parties.