The Very Serious Taxation Consequences of Having a Non-Complying SMSF

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IN PART 1, you discovered the main breaches that lead to non-compliance. This article outlines the very ugly tax consequences of being labelled non-compliant by the ATO.

Taxation Penalties

SMSFs are subject to income tax but receive concessional treatment — provided they are complying funds.

A complying SMSF’s assessable income is generally taxed at a rate of 15%. BUT for a non-complying fund the rate is 45%.

Reading from the ATO Practice Statement Law Administration 2006/19:

Clause 28: When an SMSF is treated as a non-complying superannuation fund it will lose its concessional tax treatment which applies to the low tax component of a complying superannuation fund. Accordingly the taxable income of a non-complying fund is taxed at 45%.

Serious Punishment

Broadly speaking, the 45% is based on the SMSF’s assets! (Minus any undeducted contributions you may have.)

On top of that, the SMSF is taxed for 45% on net income for the year in which the SMSF became non-complying — and later years, is if it remains non-complying.

Further Penalties

After the SMSF has been taxed for non-compliance, the ATO will charge interest and further compliance penalties.

In some cases, this could extinguish the balance in your Fund entirely; and the ATO may come after you personally, as the trustee.

The following is an ATO list of the factors that determine the seriousness/punishment of a contravention:

  • The behaviour of the trustee in relation to the contravention.
  • The extent to which the contravention affects the SMSF’s assets.
  • The extent to which the SMSF’s assets are exposed to financial risk and whether there is any loss to the value of the SMSF.
  • The number and duration of contraventions over a period of time.
  • The nature of the contravention in the overall scheme of the legislation.

BOTTOM LINE: There are rather serious consequences, if your SMSF is non-compliant.

If you have slipped up, you may be able to act now and avoid disciplinary action from the commissioner.

Part 3 will be the final instalment in this series — and offers you some direction and hope, if you do find yourself with a non-complying SMSF.

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