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Tribunal upholds penalties for an SMSF’s breach of the borrowing restrictions

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In the recent decision of FYYB v FC of T 2021 ATC 10-592; [2021] AATA 3567, 5 October 2021, the Australian Administrative Tribunal (AAT) affirmed the Commissioner of Taxation’s (Commissioner) decision to disallow an objection by the taxpayer to an administrative penalty of $7,500 imposed on a self managed superannuation fund (Fund) under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act).

In this case, the Fund auditor identified that the Fund had borrowed $220,000 in contravention of the prohibition on borrowing under section 67(1) of the SIS Act. In 2015, one of the Fund members borrowed $220,000 from a bank and on lent the same amount to the Fund. It was not disputed that the borrowing did not fall within any of the exceptions under the SIS Act (including, eg, the limited recourse borrowing arrangement exception under section 67A).

The Fund trustees were given time to restructure the borrowing in line with section 67A of the SIS Act, but the problem was not fixed, and the auditor proceeded to lodge an auditor contravention report with the Commissioner in 2018.

The Commission imposed penalties for contraventions of section 67(1) of the SIS Act for each of the 2015, 2016 and 2017 financial years. The total penalties imposed were $31,800. The Commissioner later exercised his discretion under section 298-20 of Schedule One to the Taxation Administration Act 1953 (Cth) (TAA53) to remit the penalty to $7,500. The taxpayer objected to the Commissioner’s decision, and the objection was disallowed.

The AAT then considered whether any part of the penalty of $7,500 should be remitted (it was not disputed that the Fund had contravened section 67(1) of the SIS Act in the 2015, 2016 and 2017 tax years).

In reaching their decision to affirm the Commissioner’s decision (and the penalty), the AAT noted that:

  • The Fund had a poor tax compliance history;

  • Even at the time of the AAT hearing, the borrowing contravention had not been fully rectified;

  • The Fund had failed to comply with the terms of an enforceable undertaking it had entered into with the Commissioner;

  • The fact that there were ‘no consequences’ resulting from the contravention did not lessen the seriousness of the contravention;

  • The Fund failed to provide any evidence that the penalty was oppressive or unjust.

This case illustrates the importance of rectifying breaches of the SIS Act, especially when seeking remission of penalties from the Commissioner. It also shows that the Courts will uphold penalties issued by the Commissioner on SMSF trustees for contraventions of the SIS Act, including contraventions of the borrowing provisions.

Phil Broderick
Principal
M +61 419 512 801 | T +61 3 9611 0163  
E: pbroderick@sladen.com.au           

Philippa Briglia
Senior Associate
T +61 3 9611 0173
E pbriglia@sladen.com.au

Phil Broderick