ATO / SMSF / SMSF Compliance

Related party loans result in trustee penalties

Disqualified

Related party transactions are the biggest problem when it comes to SMSFs.  Loans to members/financial assistance and in-house asset breaches account for more than 40% of all contraventions by SMSFs, representing 43.8% of the value of such breaches.

It is this continued focus on related party loans and other similar transactions that is seeing the ATO take action through the courts to deal with issues of non-compliance.   The decision in Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA1037 further highlights the importance of actions that can be taken to ensure compliance with the SIS legislation.

Background

Mr & Mrs Ryan between January 1999 until January 2014 (when they were disqualified from acting as a trustee), were the trustees and members of the Lawryan Family Superannuation Fund (‘Fund’).   Due to financial difficulties arising from the sale of a dry-cleaning business, the respondents through the income years 2009 – 2012 inclusive, undertook the following activities to meet ongoing personal expenses:

  • 2009 – a loan made to the fund members totalling $17,298.42 without authorisation of the fund’s governing rules;
  • 2010 – made 20 payments (loans) to the fund members, totalling $53,133.25;
  • 2011 – made 19 payments (loans) to the fund members, totalling $69,570.23, along with failing to prepare or carry out a plan to address the excess in-house assets of the fund that existed as at 30 June 2010
  • 2012 – made 28 payments (loans) to the fund members, totalling $69,674.74, along with failing to prepare or carry out a plan to address the excess in-house assets of the fund that existed as at 30 June 2011.

Over this period some of the withdrawals were made as loans and repaid.  However, the loans were unsecured, had no interest rate and no repayment term.  Other withdrawals were not repaid.  The total net amount withdrawn was $184,364 ($209,677 net of the repayments of around $28,313), effectively leaving the fund with little remaining money ($6,034).

As a result of the above actions taken by the trustees, it was identified that the following breaches had occurred:

  • Section 62(1) of the SIS Act by failing to ensure that the fund was maintained solely for one or more of the purposes prescribed in 62(1) of the Act
  • Section 65(1)(a) of the SIS Act by lending money using the resources of the Fund to the members;
  • Section 84 of the SIS Act by making loans to the members which caused the market value ratio of the Fund’s in-house assets to exceed 5% and thereby failing to take all reasonable steps to ensure that the provisions of Division 3, Part 9 of the SIS Act were complied with in respect of the Fund.
  • Section 109(1)(b) of the SIS Act by making investments as fund trustees in circumstances where the other parties to those transactions, being the members in their personal capacities, were not dealing with each other at arm’s length in respect of each transaction and the terms and conditions of those transactions were more favourable to other parties than those which it is reasonable to expect would have applied if the trustees were dealing with those other parties at arm’s length in the same circumstances.

It was as part of the audit where the Commissioner wrote to the Ryans asking each of them to show cause why they should not be disqualified from being fund trustees.  It was as this time that they admitted to (and apologised for) all of the contraventions.  Both Mr & Mrs Ryan were subsequently disqualified from being trustees of a super fund under s.126A of the SIS Act.  Having then failed to rectify the contraventions, the Commissioner wrote to the Ryans advising that proceedings would be commenced for the SIS contraventions.

Decision

After taking into account the seriousness of the contraventions, their deliberate nature, the amount of money involved, the financial position of the Ryans and their co-operation with the Commissioner, the court decided to impose a penalty of $20,000 on each of them. This penalty was to be paid in monthly instalments over three years.

The decision provides a timely reminder of the potential consequences that can be instigated upon a fund entering into various related party transactions that can quickly go from relatively small breaches to larger and more significant contraventions.

Case: Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA 1037

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