ATO: If you procrastinate, you pay

Trustees of an SMSF have been fined $40,000 in a court ruling that may have been less onerous if they’d confessed misdoings sooner and kept to their promise to fix the problem.

Key Points

  • A court has fined SMSF trustees $20,000 each for breaching the rules
  • The ATO can avoid court and penalise trustees directly
  • The trustees made if worse for themselves by dawdling

Money inside superannuation is yours to spend – when the time comes. If you bend the rules and start spending it early, the Australian Taxation Office can come down heavy.

A couple who took nearly $210,000 from their self-managed super fund over three years has been fined $40,000, or $20,000 each, after the Tax Office took them to the Federal Court for breaching the sole purpose test.

The details of the case illustrate two things: the ATO will make some allowances, but don’t push your luck.

The defendants, Mr and Mrs Ryan, were given more than 18 months to show why they should not be disqualified but after the couple failed to follow through with righting the problem and winding up the SMSF, the ATO took them to court.

It’s a sorry end to a sorry tale. But it’s trouble trustees can easily avoid.

Desperate measures

Things started to go wrong for the Ryans after they bought a dry-cleaning business, funded partly with a line of credit. The venture was a failure and the couple sold in 2007, with some debt remaining. Two years later the Ryans needed money, so they started making withdrawals from their SMSF.

Over three years nearly $210,000 was withdrawn. Some loans were repaid, but none were secured and interest was never charged.

To make things worse, the couple were four years behind on their tax affairs. When their accountant and auditor finally filed returns, it was obvious they had contravened the SIS Act.

A letter from the Tax Commissioner followed, asking the couple to explain why they shouldn’t be disqualified from running a DIY fund. The Ryans responded, offering to reverse their misdoings and wind up the fund. They were disqualified but no penalties were imposed.

That should have been the end of it, but around the beginning of this year the fund was still open, with a balance of $6,034.20.

By then, the Tax Office had had enough and the matter went to court.

SMSF penalties allow ATO to stay out of court

For trustees of a self-managed super fund to end up in court is a terrible disaster – and an avoidable one. The Ryans couldn’t have foreseen that their business was going to fail but they had managed to accumulate a reasonable level of savings for their retirement. The temptation to access those funds early and their reluctance to sort out the mess means they now have to find another $40,000 to cover the fine.

If there is anything positive to take away from the case it’s that the powers of the Commissioner of Taxation to issue penalties are now more clearly defined, and it’s likely that fewer such cases will end up before a judge.

The ATO now has the power to impose punishments for a range of breaches under section 166 of the Superannuation Industry (Supervision) Act, without the bother of launching a legal case.

Had the rules been in place when the Ryans were drawing down their fund, the couple could have expected to be fined at least $21,600 each. For the ATO, it would have been a lot easier than going to court.

The moral of the tale is to not get behind on your tax affairs and, if you do happen to have unwittingly bent the rules, be quick to tell the Tax Office about it and equally vigilant in fixing the problem.

Now that the ATO has the power to impose penalties on trustees at its own discretion, it is better to never give them any reason to come after you in the first place.

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