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Self Managed Super Fund (SMSF) Article
How ATO supervises SMSFs

By Tony Negline.

This article may be out of date.

15th March 2006

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The super laws give incredible powers to the regulators of super funds.

For example, a super regulator can suspend or remove a trustee or appoint another trustee to manage a super fund for a period of time.  A super regulator can begin civil proceedings to recover a person's assets if the regulator believes this is in the public interest.  A regulator also has sufficient powers to fully investigate a fund and it can force anyone involved in the management of a super fund to give a written undertaking to behave in a certain way.  If the regulator is unhappy with a trustees behaviour after the written undertaking has been given then further punitive action can be taken.  A regulator can decide to wind a fund up or it can disqualify trustees so that they cease to be a super fund trustee ever again.

Finally, and perhaps the biggest stick of all, a super regulator can remove a super fund's concessional tax rates by declaring the fund to be “non-complying”.  If a fund is non-complying the tax rate is increased to 48.5%.  In the first year this tax rate applies it is levied against the market value of the fund's assets less any undeducted contributions.

Depending upon the type of fund and the issue involved the regulator could be the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission or the Australian Taxation Office.

In a recent speech Raelene Vivian, Deputy Commissioner of Taxation noted that the ATO had audited 3600 Self Managed Super Funds over the last twelve months.  When a SMSF auditor finds a material breach of the super laws they must report that breach to the ATO.  Thus far the ATO have investigated 800 breaches identified by these auditors.

From their research the ATO have enforceable undertakings in place for over 80 funds, and another 100 or so in progress, have wound up 13 funds, have disqualified 15 trustees, have made six funds non-complying, and are in the process of determining whether it should take this course of action for a further seven.

Ms Vivian did note that the ATO never lightly takes away a fund's complying status because of the high tax penalties that apply.  However, “if a trustee has failed to comply with the obligations, or there are multiple breaches and the fund has shown a complete disregard for the law, our actions may result in [making a fund non-complying].  Before we make a fund non-complying we consider many factors, and if we choose to proceed we will issue a ‘show cause’ letter and a position paper outlining why we believe the fund should be made a non-complying fund.  The trustees of the fund are provided with an opportunity to respond. If we are not satisfied, we will make the fund non-complying.”

Ms Vivian said that typical problem areas for SMSFs are as follows: loans to parties related to the fund, assets held by the fund which breach the in-house asset rules, funds which do not deal with everyone (including members or their relatives) on an arm's length basis, funds acquiring assets from members or other parties related to a fund and accessing super fund assets when not retired.

So what does a trustee do who has fallen foul of the law and been penalised by the ATO but has relied on their advisers to get their fund's compliance right?  This is not an easy question to answer.  There are various potential avenues of complaint.  Unlike non-Self Managed Super Funds, SMSF trustees and members cannot complain to the Superannuation Complaints Tribunal.

The super laws give trustees powers to recover losses from a person which caused the fund to breach the super laws.  For example, suppose an adviser tells a trustee that they can acquire an asset, for example a residential property, from a fund member which the super laws do not allow.  If the fund is penalised as a result of this breach, the trustee could seek to recover their losses from the adviser.  Some clever lawyers are already looking at making use of these compensation provisions.

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