The Australian Tax Office (ATO) has various options when dealing with contraventions made by the SMSF trustees. Of course, the associated penalties differ according to the breaches; non-compliance and in-house asset rule breaches are treated differently, for instance.
ATO can issue a notice of non-compliance to SMSF trustees
If the ATO lists an SMSF as non-compliant, there is no shying away from grievous tax consequences for the SMSF in question. From that year onwards, the SMSF is deemed as non-compliant till a period in time the verdict is reversed by the ATO. For starters, the concessional tax treatment applicable to SMSFs is withheld during the phase they are rendered non-compliant. Put another way, for such tenure, they are taxed at an exorbitant 45% marginal tax rate.
Consequences of such a notice
Apart from the withholding of pension exemption, there are serious issues of interest accrual that non-compliant SMSFs have to face. If for instance, the notice of non-compliance served by the ATO pertains to a year-long since passed, the errant SMSF will accrue substantial interest (which can only perhaps be remitted to a certain extent) over the whole time frame.
Auditor Contravention Report
It all starts with a particular SMSF’s auditor filing an Auditor Contravention Report (ACR). Based on the documents and evidences that need to be furnished by an SMSF under scrutiny, the ATO infers whether the trustees are at fault or not, and what the degree of their error is.
Has the contravention been rectified?
The ATO further figures out the extent to which the errant trustee has tried to undo the damage and rectify the contravention. If the ATO feels that an SMSF contravention hasn’t occurred as cited by the ACR or that it has been adequately rectified, the premier body is well within its rights to lay the matter at rest.
Amended tax assessment
If the ATO is convinced otherwise, it can choose to send a notice of non-compliance stating where a particular SMSF has contravened and ask the SMSF to prove why it thinks it’s in the right. In case of non-compliance, a trustee is served with an amended assessment of tax; one that will be imposed on the fund till the time it is rendered non-compliant.
In my opinion, you should definitely speak to a trusted SMSF expert to make sure you have the best chances of success in your particular case. If something is working on your mind, feel free to get in touch with me.