The SMSF Club | SMSF trustee penalties for non compliance
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SMSF trustee penalties for non compliance

22 Feb SMSF trustee penalties for non compliance

While taking control of your Super is becoming increasingly popular, managing your own SMSF comes with increased responsibility and obligations as the size of your superannuation is going to dictate the quality of yours and your family’s life in retirement.

There are also many rules and regulations that are designed to protect your retirement income. As a trustee of a SMSF you need to adhere to these rules and know that you are ultimately responsible for the running of your SMSF.

Tax consequences of exceeding the contributions caps

Excess contributions can be taxed at a rate of 93%, if you exceed both the concessional and non-concessional contributions caps in a financial year.

How can excess contributions possibly be taxed at 93%?

  • Any contributions over the concessional cap are taxed at a rate of 31.5% plus the initial 15% income tax paid by the SMSF. We are already at 46.5%.
  • These excess concessional contributions are counted towards the member’s non-concessional contributions.
  • If the member also exceeds the non concessional contributions cap, then those contributions over the non-concessional cap are taxed at a rate of 46.5%.
  • This means, that contributions over the concessional cap that cause a member to exceed the non-concessional cap will be taxed at 93% (that is: 31.5% excess concessional contributions tax, plus 15% income tax, plus 46.5% excess non-concessional contributions tax).

As you can see, you should always ensure that contributions made to an SMSF are within the contributions caps.

Penalties for illegally accessing your super early

A SMSF like all Superannuation funds are there to provide for ones retirement. There are huge tax incentives to save for retirement using superannuation. While there are many incentives to use Superannuation as a vehicle to save for retirement, there are also huge penalties if you access your super prior to reaching your preservation age.
Severe penalties apply for illegally accessing your super early, they include;

As a trustee, if you knowingly allow illegal access of super savings, you may face penalties of up to $340,000 and jail terms of up to five years, or fines of up to $1.1 million for corporate trustees.

  • You may be required to pay interest and penalties on super you have accessed illegally.
  • It has been proposed that in the very near future, any super that you have accessed illegally will be taxed at 45% regardless of your marginal tax rate.
  • In addition, as an SMSF trustee you can be disqualified if you allowed super savings to be accessed early from the fund. Disqualified people are unable to operate as a trustee of an SMSF.
  • If you illegally access your super early, it is included in your taxable income, even if you return the super savings to the fund later.
  • There may be other penalties, depending on your involvement in the scheme.

As a recent case highlights, regulators take firm action against SMSF trustees who don’t comply with the super laws. The ATO can make a fund non-complying, disqualify trustees and apply to the court for the imposition of monetary penalties.
In the case of Olesen v Parker [2011] FCA 1096, the Federal Court imposed penalties totalling $50,000, plus $5,000 in legal costs, on husband and wife trustees who seriously contravened the super laws. The penalties were additional to previous action taken by the ATO which included disqualifying the trustees and making their SMSF non-complying, removing their income tax concessions and resulting in a $139,570 income tax liability.

The SMSF made a number of loans to related entities breaching the In-house assets and transitional rules, the arm’s-length investment rules and the sole purpose test.
In determining the seriousness of the contravention and the penalty, the court considered factors including the nature and extent of the contraventions, the trustees’ knowledge of their obligations under the super laws and the amount of loss or damage caused.

The court found the contraventions were deliberate and repetitive, having taken place over a period of over three years. The trustees were also aware of their obligations under the super laws, having been permitted to rectify previous breaches by way of an enforceable undertaking.

The court also found that the contraventions put a significant amount of the fund assets at risk. By the end of the contravening period, the account balance of the fund was reduced to almost nil. The court found that such penalties strike an appropriate balance between deterrence (specific and general) and penalty for the contravening conduct without being oppressive.

This decision makes it clear that there can be severe consequences for SMSF trustees who do not comply with the super laws.