Written by Alex Frazer in February, 2011

There has been an increase in media attention surrounding the ATO’s toughened stance on prosecuting non compliant self managed super funds (“SMSF’s”) in the last 18 months. This article seeks to explain the reasons behind the Australian Taxation Office’s (“ATO”) crackdown on non complying SMSF’s, the penalties which are imposed on a non-compliant fund and the most common reasons for why a SMSF is marked non-compliant by the ATO.

In 2009, 160 SMSF’s were declared as non-compliant compared to 24 in 2008 and only 7 in 2007. Justification of these figures showing a marked rise in non-compliance is recognised as a tougher stance by the ATO in prosecuting these funds rather than there being a noticeable increase in non-compliant behaviour. Such is the determination of the ATO to prosecute non-complying funds that “the ATO has thrown a lot of resources at it with 120 call centre staff dedicated just to phone late lodgers”[1] according to Assistant Commissioner Forsyth from the ATO.

Once a fund has been deemed as non-compliant it loses the ability to obtain discounted tax benefits, is hit with penalty interest charges such as retrospective full marginal interest rates (currently 45 percent) which may go back many years depending on the age of the fund and the date at which the initial breach of the law occurred.

The two most common reasons for a SMSF to be marked as non-compliant are because of loans to a related party of the fund or due to late or non lodgements of SMSF returns. Related party loans are a very common temptation for a number of SMSF’s. A family SMSF may have mum and dad also running a small business separate from the fund. If the business runs into trouble, there is a significant temptation to draw funds from the SMSF to assist with the small business liquidity. When the SMSF’s financial reports are prepared and subsequently audited, the funds which have been removed are usually disclosed as a loan to related parties, a contravention report is lodged with the ATO.

There is still a long way to go with respect to the increased regulation and enforcement of SMSF’s within Australia. SPAA Chief Executive Andrea Slattery has quoted statistics that “about 9000 SMSF’s were tagged by auditors last year”.[2] Given that ATO records reveal that there are 411,000 self managed super funds in Australia, which hold a combined value of $37 billion dollars in assets, the ATO will no doubt need to broaden its audit oversight relating to SMSF’s and increase the number of employees who are dedicated to the enforcing compliance of SMSF’s with respect to lodgement. If the ATO can continue its toughened stance on SMSF’s, it will be able to work towards a SMSF system where the funds which are meant to be distributed at the appropriate time will stay in that fund until the correct withdrawal period, rather than at the discretion of fund members who may loan fund monies to related parties.

[1] Cashdata Newsletter ,2010, www.cashdata.com.au
[2] Barrymore, K., Feb 28 2010, ATO crackdown on DIY super funds, News Limited Newspapers

PLEASE NOTE: All information contained in the articles below was correct at time of publishing.