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 that meet the extensive requirements of the legislation are said to be “complying” funds, meaning they comply with all legal requirements.

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 involved an SMSF with three family members acting as trustees. One trustee had a severe addiction issue and stole all of the fund’s assets, which resulted in the Australian Taxation Office declaring the fund to be non-complying.

This led to 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 assessments issued to the trustees.

From the Court decision, it is apparent that the trustees’ actions after discovering the theft contributed to the non-complying declaration.

A different approach by the trustees may have preserved the fund’s complying status. The use of a company as trustee would also have avoided personal liability for the penalty tax.

Non-Complying Status Is the End of a Process

It is important to appreciate that non-complying status can only be declared by the Australian Taxation Office. It is not something trustees decide themselves, nor something that the fund’s auditor can determine.

Even where breaches of legislation exist, an SMSF is only non-complying if the Australian Taxation Office formally makes that declaration.

Strategies to Avoid Non-Complying Status

If you are concerned about possible legislative breaches by your SMSF, you should engage Rands Advisory Group.

We can work with you to understand the full circumstances, identify available options, and help implement an appropriate strategy to minimise the risk of becoming a non-complying fund and return to full compliance with all requirements.