Over the past few months we have seen a range cases involving self managed super funds impacting the fund’s complying status or where income has been taxed as non-arms length (i.e. special income). These cases not only outline the importance of appropriately structuring your fund and its investments, but also how the behaviours of trustees in “doing the wrong thing” will only magnify the Regulator’s spotlight in making the fund non-complying.
Recent AAT cases of Montgomery Wools Superannuation Fund and Triway Superannuation Fund demonstrate how a trustee’s behaviour can influence the ATO’s approach to deciding in making a fund non-complying.
Section 42A(5) gives the Commissioner discretion to issue a notice of compliance if a trustee of the superannuation fund has contravened one or more of the regulatory provisions of the SIS Act or SIS Regulations.
Practice Statement PS LA 2006/19 outlines a range of factors that the ATO will consider in deciding whether a notice of non-compliance should be given to a superannuation fund where the trustee has contravened one or more of the regulatory provisions. The Practice Statement outlines that the following factors should be considered when assessing the seriousness of the contravention:
- The behaviour of the trustee in relation to the contravention;
- The extent to which the contravention affects the fund’s assets;
- The extent to which those assets are exposed to financial risk and whether there is any loss in the value of the fund;
- The number and duration of the contraventions over time; and
- The nature of the contraventions in the overall scheme of the legislation.
In addition to these requirements, there are other relevant circumstances to also consider when deciding whether to exercise the discretion to treat a non-complying fund as complying:
- Whether the trustee has rectified the contravention, entered into an enforceable undertaking or taken action to prevent the contravention recurring;
- The trustee’s level of skill and knowledge;
- The compliance history of the fund before and after the contraventions; and
- The events which lead to the contravention and whether these influenced the trustee’s decision, including serious illness.
There are instances such as the Montgomery Wools’ case where the behaviours of the trustee to not adhere to superannuation law have ultimately lead to the ATO and the Courts taking an unfavourable view on allowing the fund to receive concessional tax treatment ordinarily available to them. I have come across over time, examples where SMSF trustees have ‘dipped’ into the fund in order to keep a business afloat or where a charge may have been put over a super fund asset as security for a personal or business loan. This type of disregard for the law, and in many instances a lack of action or interest by the trustee to remedy the situation will mean that the Commissioner will take a very dim view to a fund retaining its complying status.
What other areas are likely to attract the attention of the Commissioner?
The following examples are provided within PS LA 2006/19:
- SMSF returns not lodged for several years;
- a loan made to a relative of a member;
- where a range of individual indiscretions amount to an aggregated serious breach.
It is sometimes easy to forget that superannuation provides us all with tax concessions to help build for our retirement. This privilege can easily be taken away for those who have little regard for adhering to the rules. Make sure you understand what you can and can’t do within a SMSF to enjoy building a retirement nest egg for your future!!