How to Rectify Your Non-Complying SMSF

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LET’S REFRESH: In Part 1 we looked at areas of non-compliance; and then moved onto the potentially draconian tax consequences in Part 2.

If you have a non-complying SMSF, this final instalment will give you some direction (and hope) as to the action you can take.

If you have admitted that you are non-compliant to the ATO, the following considerations will determine your outcome.

Considerations

The ATO lists a range of options to deal with contraventions:

  1. Making the SMSF a non-complying superannuation fund by giving the SMSF a notice of non-compliance;
  2. Accepting an undertaking from the trustee to rectify the contravention;
  3. Disqualifying individual trustees and prohibiting them from acting as a trustee of an SMSF or as a responsible officer of a corporate trustee of a superannuation fund;
  4. Suspending or removing the trustee;
  5. As part of an investigation, freezing the assets of the SMSF if there is a risk of the members’ benefits being eroded; and
  6. Seeking civil and/or criminal penalties through the courts.

The second point is often your best recourse, if you have offended.

Rectifying the Non-Conformance

The ATO considers the action you take to fix the non-compliance a large factor in determining the severity of your penalties.

For example, you may have made a $50,000 loan to a family member’s business and it exceeded the in-house asset threshold. ATO regulators then may accept a rectification proposal that you will repay the loan at $2,500 per month at an interest rate 3% above the current mortgage rate.

If possible, your best option is to rectify the non-compliance immediately before approaching the ATO.

In either of the above circumstances, you cannot expect to get off scott-free. But your actions will be looked upon favourably, especially with innocent mistakes.

If you take this approach, you can avoid the severe taxation consequences that you read about in Part 2.

BOTTOM LINE: If you have a problem, proactive rectification works in your favour. The ATO will appreciate the action you take, and you will tend to come out of the situation with a far better outcome.

However, it may be a different story … if you are a serial offender.

Most trustees are trying to the right thing. And the ATO seeks to work with trustees to fix their problems and, in most cases, get them back on track.

The big take away is “get in first” — if you wait for the ATO to get involved, you will receive harsher penalties than if you address the issues of non-compliance yourself.

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