There are many advantages in utilising a self-managed super fund (SMSF) – such as the removal of administration fees associated with retail funds and the ability to control how your super is invested – but those advantages come with legal responsibilities to ensure that the fund complies with strict regulations.
The result is that when the management of a self-managed super fund fails to meet the standard required under the law, the consequences can be drastic – even criminal.
More so at present, as the Australian Taxation Office (ATO) has significantly stepped up efforts to monitor and investigate tax compliance for SMSFs.
The increased focus of the ATO on compliance with regulatory requirements for SMSFs is underlined by the number of trustees of SMSFs that face criminal sanctions for non-compliance with their legal obligations.
The writer recently had reason to be in Downing Centre Local Court for the Commonwealth Criminal matters list. The list contained approximately eight matters – all relating to the failure to lodge taxation returns – of which, at least four matters involved trustees of self-managed super funds.
Failing to lodge a tax return is a criminal offence under section 8C of the Taxation Administration Act 1953 (TAA), and in the context of annual returns for self-managed super funds, is also an offence under section 35D of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).
The fines for these offences can be significant – particularly where (as is often the case) the trustee of the SMSF is a company.
A first offence under section 8C of the TAA has a maximum fine of $2,200, a second offence has a maximum fine of $4,400, and a third offence (and any subsequent offence) has a maximum fine of $27,500.
The problem is that most cases of failure to lodge tax returns involves more than one offence, as it is usually the case that returns have not been filed for a number of years.
This means that the maximum fine of $27,500 may be imposed on the first occasion that a taxpayer comes before the court for such offences. A first offence under section 35D of the SIS Act can potentially lead to a fine of $5,500.
A criminal offence against a company can potentially have other serious consequences – both for the company and the directors.
Under section 8Y of the TAA, an offence by a company under section 8C of the TAA can potentially lead to imprisonment against the directors of the company, although it should be noted that such a consequence is an extreme one.
Further, an offence can lead to problems with loans, professional accreditations, and the ability to travel overseas.
In the context of SMSFs, there is a further serious consequence for an offence – it can result in the SMSF going from the complying superfund to a non-complying superfund.
This is because an offence under section 35D of the SIS Act is a contravention of a regulatory provision for the purposes of the “compliance test” in section 42A(5) of the SIS Act.
A super fund loses many of its tax benefits when it is regarded as a non-complying fund. As such, non-complying status can result in a significant financial penalty to the fund and its members.
The ATO has discretion as to whether to regard a fund as a non-complying super fund for a contravention of the compliance test.
However, in Practice Statement Law Administration PS LA 2006/19, the ATO indicates that a failure by the trustee to lodge annual returns is a reasonable basis on which to provide notice of non-compliance.
This discretion of the ATO is subject to administrative review, but the limited approach to such reviews can be seen in a recent decision in the Administrative Appeals Tribunal of Triway Superannuation Fund and Commissioner of Taxation  AATA 302 (10 May 2011) where Senior Member O’Loughlin stated as follows:
“It is only natural to have sympathy for the trustees in this matter. Addiction to illicit drugs is a scourge of modern society. And it is not just those addicted who suffer.
The families of those addicted often suffer in many ways, including seeing the destruction of loved ones’ lives and at times by the misappropriation and theft of money and assets by the addicts to finance their habits.
In the present matter, the husband and wife have seen and experienced both of these phenomena, and have had their then retirement savings extinguished.
“However, the SIS Act plays an important role in the wider system of encouraging the community to provide for their own retirement and ease the strain on public welfare resources.
“In the present matter, the breaches of the standards required of superannuation funds to be concessionally taxed are particularly serious.
“While tragic, the present circumstances are not those in which a discretion ought [to] be exercised consistently with the principles governing the exercise of discretionary powers.
To do so, would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately and lost as a consequence.
Exercising a discretion in these circumstances is not consistent with the objects of the SIS Act.”
These comments suggest that even seriously extenuating circumstances will not be sufficient to mitigate a failure to comply with the regulatory requirements.
There are a number of ways in which the serious consequences mentioned above can be avoided:
The first and most obvious is that trustees of SMSFs should ensure that all regulatory requirements are complied with.
If a person utilising a SMSF does not have the time or the knowledge to ensure the fund is compliant, then a SMSF is most likely not the appropriate option for that person. Such persons should look to use a retail fund.
The ATO is usually reasonable when it comes to the non-lodgement of taxation and other returns.
In most cases, they will issue numerous warnings (including a final notice) prior to taking further action.
Such warnings should be heeded at the first opportunity and taxpayers should always seek to cooperate with the ATO.
Where a final notice is received, it should be treated with extreme seriousness.
Even at this stage, the ATO officers can be reasonable, and if there are extenuating circumstances, they may still be prepared to grant an extension of time for compliance.
Open communication with the ATO is critical to ensuring that the matter is not referred for criminal prosecution.
Neither the ATO nor the Court will be influenced by the fact that no tax is actually owed, or in fact a refund is due, in respect of the period for which no return was lodged.
Accordingly, do not expect such an argument to provide you with a defence or a basis for leniency.
The tax laws require returns to be lodged, irrespective of whether there is any underlying liability.
If the above steps have not been undertaken, then the matter will likely be referred for criminal prosecution.
At this stage, the options are fairly limited, with the only real hope being to apply for an order under section 19 of the Crimes Act 1919 (Cth) – that the offence is proved but no conviction is recorded.
Such applications are not easy to obtain and the courts will be contemptuous of any submissions that a failure to lodge a tax return is a trivial offence.
However, where it is a first offence and the consequences of a criminal offence will be particularly harsh (for example, a criminal offence for a pilot may prevent him carrying out his job due to the restrictions placed on travelling overseas for persons with criminal offences), then such applications will have merit.
SMSFs are attractive to astute investors for many reasons, but there is a trade-off – a responsibility to ensure that the fund complies with its legal requirements, and a failure to meet this responsibility may be criminal.