What happens when SMSF trustees breach super laws?

Setting up your own self managed super fund (SMSF) can have its benefits, but it also comes with significant obligations.

These include appointing trust members, trustees and a registered super fund auditor; valuing assets each year; paying levies and taxes; ensuring audits are conducted and minimum payments are made annually; and making lawful investments. The list goes on.

Contraventions and audits

There’s a lot to keep on top of. If you’re a trustee and fail to comply with certain requirements under the super laws, your auditor will report the breach to the ATO within 28 days. This type of breach is known as a contravention.

Once you become aware of your contravention, you’re required to correct it as soon as possible, with the help of your auditor or your SMSF adviser if needed.

If the contravention continues to be unrectified, you can use the ATO’s “SMSF voluntary disclosure service”. If this is done before the ATO conducts its own audit into your breach, the regulator will take this into account in their final deliberations.

Voluntary disclosure is a formal process involving completion of a detailed form and providing supporting documentation.

Undertaking

As the penalties can be quite serious, you may decide to try to mitigate the outcome by initiating an undertaking to remedy the contravention.

This needs to highlight your commitment to stopping the unlawful behaviour and addressing the action you’ll take to rectify the breach.

More specifically, you need to document a timeframe and a breakdown of your proposed remedial action, and include strategies to ensure the contravention doesn’t recur.

Possible penalties

There is a range of penalties the ATO can apply to a contravention depending on its severity, including:

• issuing a trustee or a director of a corporate trustee with a direction to rectify the contravention – this can lead to disqualification and/or the removal of the fund’s complying status;
• applying administrative penalties – fines of thousands of dollars – can be imposed on trustees, which can’t be paid from the fund;
• where a trustee illegally accesses their super, including this accessed amount in their assessable income;
• issuing the SMSF with a notice of non-compliance, with severe tax consequences;
• disqualifying an individual from acting as a trustee or director of a corporate trustee, preventing them from becoming a trustee again;
• freezing the SMSF’s assets; and
• imposing civil and criminal penalties through the courts.

Winding up your SMSF in the event of a contravention will not stop the ATO’s compliance action.

Factors in ATO assessment 

When the ATO considers your SMSF contravention and the applicable penalties, it will take into account whether you intended to breach the law, how you communicated the contravention to the ATO and if you tried to repair it.

In a recent case, the Administrative Review Tribunal supported the ATO’s decision to disqualify an SMSF trustee for multiple unauthorised withdrawals from the fund. Although he finally repaid the outstanding balance, he had ignored many warnings from the fund's auditor about these serious contraventions over several years. The fact he was also a qualified accountant strengthened the ATO’s case that the contraventions were deliberate, he was aware of his unlawful behaviour and his lack of insight  indicated an ongoing compliance risk.

If it’s likely you have contravened a super law in your SMSF, the first step is to seek professional advice to ensure you keep your integrity as a trustee and the integrity of your fund intact.

Source: ATO - Our SMSF non-compliance actions