There are several options that the ATO has to deal with contraventions of superannuation law by the trustee of a self-managed superannuation fund.
A consistent theme throughout these options, however, is the importance of the dealings of the trustee in relation to a contravention.
The ATO may render an SMSF non-compliant. This usually carries devastating tax consequences.
Once a notice of non-compliance is issued in respect of a fund for a year of income, the SMSF is treated as a non-complying superannuation fund from that income year onwards, unless it is later deemed to be complying.
While an SMSF is non-compliant, it loses its concessional tax treatment and is taxed at the highest marginal tax rate (currently 45%).
The SMSF’s assessable income will also include the market values of the SMSF’s assets just before the start of the income year in which the SMSF has been deemed non-compliant (less the sum of crystallised, undeducted contributions after June 30, 1983 and all contributions made after June 30, 2007 which are not to be included in the SMSF’s assessable income).
Further, while non-compliant, the pension exemption is not available.
Interest is also usually payable. The interest accrued can be substantial where the ATO issues the notice of non-compliance in respect of a financial year that has long past. That being said, a request can be made for the ATO to remit the interest.
Process of non-compliance
Many SMSFs are rendered non-complying pursuant by the following process:
- The SMSF’s auditor lodges an auditor contravention report. Each year auditors lodge ACRs in respect of approximately 2% of all SMSFs.
- Initially, the ATO is interested in finding out whether there are contraventions by the SMSF trustee. The ATO usually requests documentation, details and evidence of any steps taken by the trustee to rectify any contraventions. If the ATO is satisfied that there are no contraventions, or that any contraventions have been appropriately rectified (which is the case in about half of all ACRs), then the ATO might choose to take no further action. However, the ATO can seek to pursue other courses of action.
- Subject to the information received from the trustee, the ATO might form the view that contraventions did occur. The ATO may have discretion as to whether to issue a notice of non-compliance. If they are considering issuing a notice of non-compliance, they generally explain their reasons and typically provide the trustee the opportunity to submit reasons why the SMSF should not be made non-complying. If the ATO are convinced of such reasons, then the ATO might take no further action.
- If not, the ATO might issue a notice of non-compliance. The ATO usually also notifies the trustee that an amended tax assessment will be issued in due course. The trustee is typically given 21 days to request a review of the decision.
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