The Administrative Appeals Tribunal has recently upheld an ATO decision to make a SMSF fund non-compliant. The case JNVQ and Commissioner of Taxation [2009] AATA 522 was handed down on 14 July 2009 in Brisbane sending a clear message to all SMSF trustees and financial planners advising SMSFs.
Within the tax office, the declaration of a fund as non-compliant is generally viewed as a last-resort. This is due to the harsh 46.5% tax penalty (based on fund balance less tax-free component multiplied by 46.5%) that applies to non-compliant super funds.
The facts of the case are that the fund’s trustees contravened the in-house asset rule in superannuation law and had taken years to rectify the position. Under the in-house rule, a SMSF must not invest, lend or lease to related parties (including members) of the fund more than 5% of its assets.
The SMSF involved in the case made loans to a related company to support its business activities. The loans were much higher than permitted under the in-house asset rule.
On 23 July 2007, the fund’s auditor lodged a contravention report advising the ATO that, as at 12 August 2004, the fund had contravened the in-house assets rules.
SMSF trustees have a real legal obligation as trustees and this case has proven the price that can be paid for taking this lightly.
Advisers should all be well aware of the investment rules that apply to SMSFs and should work with Accountants and Auditors to quickly rectify a potential breach before the ATO applies this heavy penalty.
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