ATO Crack Down on SMSF

Date Added: 18/06/2012 by Juris Stega - Baker Affleck Moffrey

The proliferation in Self Managed Superannuation Funds (SMSFs) over recent years has caused the Australian Taxation Office (ATO) to increase its compliance focus on trustees of SMSFs. In the 2010-11 year, the ATO conducted 5,200 regulatory and income tax cases and just over 2,700 early release cases against individuals in control of SMSF’s.

As SMSF’s operate in a tax advantaged environment (15% tax on income) it is imperative that trustees comply with superannuation law and regulatory requirements. If trustees contravene or breach the rules the consequences could include:

  • making the SMSF non-compliant; and 
  • civil and criminal penalties for the trustee with fines of up to $200,000 and/or imprisonment for up to five years. 

Non-compliance results in an SMSF being taxed at 45% on both its income and the value of its assets (less undeducted and non-concessional contributions) as at the start of the year in which the non-compliance occurred. Current ATO compliance activities targets include:

  • investments in related parties; 
  • loans to related parties; 
  • breaches of the 5% in-house asset cap; 
  • calculation of exempt current pension income; 
  • receipt of non-arm’s length income; and 
  • early access to superannuation benefits. 

The ATO will not hesitate to prosecute trustees for serious breaches of superannuation law.
In the recent case of Olesen v Parker [2011] FCA 1096 the Federal Court imposed penalties of $50,000 on the husband and wife trustees, plus $5,000 in legal costs, due to serious breaches of superannuation laws. In addition, the trustees were disqualified and their SMSF was made non-compliant. 

The SMSF had made loans to related parties over a number of years which resulted in serious breaches of the in-house asset rules, the arm’s length investment rules and the sole purpose test.
Post-GFC many small business owners have been tempted to use super fund moneys as a source of finance. While it is your money, it is not yours just yet. The money is held in trust to provide for your future retirement and must be invested with this objective in mind. An understanding of superannuation law and effective structuring are prerequisites to the making of loans to related parties. Olesen v Parker is an example of the consequences of getting it wrong.

In AAT Case [2011] AATA 940, Re Shail Superannuation Fund and FCT the AAT affirmed the non-complying status of a SMSF for the 2005 income year. The SMSF had a husband and wife as trustees. The husband, without the knowledge of the wife, fraudulently removed $3.46 million from the SMSF cash management account and transferred the funds to an overseas bank account in his name.

The ATO issued the SMSF with a default tax assessment of $1.5 million and a penalty tax assessment of $1.475 million. The default assessment was necessary as the SMSF had not

lodged an income tax return for the 2005 year. The AAT held that the SMSF was non-compliant, a tax deduction was not available for the misappropriated funds and the assessments stood.

As SMSF annual return lodgements are fast approaching, trustees should now arrange the preparation of financial statements for the 2011 income year, an audit to confirm compliance with the law and the preparation and lodgement of the income tax return.

Should a contravention or breach of superannuation law have occurred, Baker Affleck Moffrey can recommend an appropriate course of action to rectify the breach.

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