One of the main differences between owning a Self Managed Super Fund (‘SMSF’) and owning other entities is that your SMSF must appoint an auditor (at least 45 days before your first annual return is due), and then have the SMSFs accounts audited each year by the auditor.
Not only does the auditor have to audit the accounts but they must also ensure that the fund has complied with all the rules. If the auditor determines that the fund has not complied with the rules they must report that contravention to the ATO.
Usually, when the auditor finds a contravention of the rules, they will discuss this with the trustees and work out how to rectify the contravention. When the auditor notifies the contravention to the ATO, they will also usually notify how it was fixed. This will usually lead to no action being taken by the ATO.
But sometimes the trustees are not so willing to fix their contravention, and in these instances, the ATO can impose substantial penalties on the trustees who have to pay those penalties personally rather than through the assets of the fund.
Although contraventions are not common and only occur in around 2% of funds each year, there are commonly occurring contraventions that can occur frequently. These include things such as the fund lending money to a member or a relative of a member, or members taking money out of the fund before they are entitled to.
In any of these instances, it is essential that the money is paid back, with interest, as soon as it is realised that the money wasn’t to be taken. If you don’t do so, the penalties will usually end up costing more than the money that was taken, which will result in losing more money altogether.
Aside from financial penalties, the ATO can also implement other penalties. These can include education orders where they direct you to do some free study about being the trustee of an SMSF.
If you are not willing to show the ATO that you are interested in fixing any contraventions or your contraventions are too prevalent, they have the ability to disqualify you from having an SMSF.
The biggest penalty that the ATO can impose is classifying your fund as non-complying. This will result in the whole fund being taxed at around 47%, and you will immediately lose close to half of your overall superannuation total.
This is why it is of paramount importance that you work together with your auditor and ensure that you fix any contraventions as soon as possible, once you are made aware of them.
If you have any concerns about compliance of your SMSF, please give me a call on 0432 366 690 or make you free 15 minute appointment here.