When is a fund non complying?

In order to secure numerous taxation concessions, the trustees of an SMSF must make an irrevocable election that the fund will comply with the requirements of the applicable legislation. SMSFs which meet the extensive requirements of the legislation are said to be “complying” funds.

On the other hand, the Australian Taxation Office has the power to declare an SMSF to be “non-complying”. This is usually as a result of what is considered by the Australian Taxation Office to be very serious breaches of the legislation.

The consequences of being declared a non-complying fund are a loss of taxation concessions and a fine equal to 45% of the market value of the SMSF’s assets.

ATO Declares SMSF Non-Complying

One documented example of this was where an SMSF had three family members who were all trustees. Unfortunately, one of them had a severe addiction issue and stole all the fund’s assets, which caused the Australian Taxation Office to declare the fund to be non complying. This resulted in the other trustees being personally served with tax assessments for hundreds of thousands of dollars. The Court upheld both the declaration of non compliance and the tax bills served on the trustees.

It is apparent from reading the Court decision that the trustees’ actions after discovering the theft contributed to the non-complying declaration. A different approach on the part of the trustees may well have seen the fund’s complying status preserved. The use of a company to be trustee would have avoided any personal obligation by the trustees to pay the penalty tax.

Non-Complying Status is the End of a Process

It is important to appreciate that non-complying status can only declared by the Australian Taxation Office. It is not something that you decide yourself or even something which the fund’s auditor can decide. Even though there may be breaches of the legislation, an SMSF is only non-complying if the Australian Taxation Office makes such a declaration.

Strategies to Avoid Non-Complying Status

If you are concerned about possible legislative breaches by your SMSF, you should engage PKF. We can work with you to understand the full circumstances, identify options and help implement an appropriate strategy.