Recent ATO crackdown on SMSF trustees and non-compliance

The ATO has cracked down on SMSF trustees who have breached the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). The recent crackdown is the result of a number of SMSF trustees prematurely accessing their superannuation funds. Non-compliance with the SIS Act can have serious consequences for SMSF trustees. Outcomes include fines imposed by the Federal Court and, potentially, the SMSF being wound up.

In Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA 1037 the Federal Court fined 2 individual SMSF trustees $20,000 each for loans to SMSF members and other withdrawals from their SMSF in contravention of the SIS Act.

SMSF trustees should be mindful of the options available to the ATO to act against trustees who breach the SIS Act and the importance of ensuring their SMSF is a compliant fund.

Summary of the facts

The Ryans were the individual trustees, and the only members, of the Lawryan Family Superannuation Fund. It was found that over a 3-year period between June 2009 and June 2012, the Ryans withdrew nearly $210,000 from their SMSF in 68 transactions, leaving a minimal balance. The withdrawals were treated as loans, but were undocumented and unsecured, no interest was paid and no repayment date agreed.

The Federal Court of Australia held that the Ryans had contravened the following sections of the SIS Act:

• section 62 (sole purpose test) — the Court found that none of the core or ancillary purposes were satisfied on withdrawal of the money from the fund and, therefore, a contravention of section 62(1) occurred;
• section 65 (prohibition against financial assistance) — the Court found that their withdrawals from the fund gave them financial assistance in contravention of section 65(1);
• section 84(1) (in-house asset rules) — this section provides that each trustee of an SMSF must take reasonable steps to ensure that the in-house asset rules are complied with. The withdrawals from the fund by the Ryans caused the market value ratio of in-house assets to other assets to exceed 5%, and they did not carry out a plan to reduce the level of in-house assets. Therefore, the fund contravened section 84(1) by infringing sections 82 and 83; and
• section 109 (rule requiring arm's length dealings) — the withdrawals contravened section 109 because the withdrawals by the Ryans of loans for their own purposes were not at arm's length and were on more favourable terms than would be reasonable to expect if they were at arm's length.

The Court imposed a combined fine of $40,000 to be paid over 3 years, disqualified the Ryans from being the trustees of a superannuation entity and rolled their remaining superannuation benefits into a public superannuation fund.

The Ryans were also ordered to pay the ATO's costs.

Why is this case important?

This case acts as a reminder to SMSF trustees of:

• the options available to the ATO to penalise trustees who breach the SIS Act;
• the importance of ensuring their SMSF is a compliant fund;
• the importance of understanding the legal obligations imposed on SMSF trustees; and
• the importance of properly documenting all SMSF transactions to demonstrate that the fund has been managed in accordance with superannuation law.

Investment strategy

One way that SMSF trustees can manage and monitor their superannuation law compliance is by ensuring any transactions, or investments of the fund, are carried out in accordance with the fund's investment strategy and are appropriately documented.

Superannuation law requires all SMSFs to have an investment strategy (or strategies). The SMSF's investment strategy sets out the SMSF's investment objectives and specifies the types of investments the fund can make. The investment strategy should be in writing and must:

• be reviewed regularly to ensure it continues to reflect the purpose and circumstances of the fund and its members (any review and decisions made should be documented); and
• consider several specific factors such as the risk, liquidity and diversity of investments, the fund's ability to pay liabilities (such as pensions) and whether to hold insurance cover (such as life insurance) for each member of the SMSF.

If SMSF trustees are considering investing in an asset type not permitted under the investment strategy, this should indicate to them that they need to get advice before proceeding. If they proceed without this advice, there is a risk that the trustees will contravene the investment strategy and, the governing rules of the SMSF.

Following the fund's investment strategy is just one way that SMSF trustees can help to ensure their investments will comply with the law. However, this will not always guarantee compliance, so trustees should ensure they generally understand their obligations and seek advice when they are in doubt.

How are contraventions dealt with?

SMSFs must be audited annually. Any contraventions may be discovered by the SMSF's auditor, and it is most likely that they will request that the trustees correct the contravention immediately. Auditors are obliged to report contraventions to the ATO.

In the case of more severe contraventions, the ATO has the power to require the trustees to enter into a plan to rectify the contravention, with or without necessarily imposing any sanctions.

If the circumstances require sanctions to be imposed in order to protect the members' retirement incomes, the ATO may, by written notice given to the trustees, direct the trustees not to dispose of, or otherwise deal in a particular way with, any of the assets of the SMSF until the notice is revoked. In more serious cases, the ATO may fine, suspend, remove or disqualify one or more trustees.

Understanding your obligations as trustees

SMSF trustees and directors of corporate SMSF trustees are required to make a specific declaration before commencing to act as a trustee or director. A copy of the declaration form is available from the ATO website, and is also provided with relevant Cleardocs SMSF packages. The declaration sets out key obligations of SMSF trustees. It is important that SMSF trustees read and understand this document before signing it and, if necessary, seek professional advice.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the superannuation team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of matters.

Order Cleardocs trust packages

• Set up an SMSF
• SMSF set up + register corporate trustee
• Update an SMSF deed
• Set up an SMSF pension
• Create an SMSF Investment Strategy
• SMSF Death Benefit Nomination — binding or non-binding
• SMSF Death Benefit Agreement — binding and permanent
• SMSF Minutes & Resolutions Package