Cases on the making of self managed superannuation funds (SMSFs) non-compliant are relatively rare. Issuing a notice of non-compliance is one of the most severe penalties available in an SMSF context, given the taxation implications (ie the non-complying fund is issued with a tax bill equal to the market value of the SMSFs assets (less non-concessional contributions) multiplied by 45%). In the recent decision of Coronica and Commissioner of Taxation (Taxation) [2021] AATA 745 (1 April 2021), the Administrative Appeals Tribunal (AAT) upheld the decision of the Commissioner of Taxation (Commissioner) to make an SMSF non-complying. While the Commissioner also issued a notice of disqualification to the SMSF trustee, the AAT reserved its decision on the question of disqualification.

Background

An individual owned and operated his own accounting practice since 1970, and established his own SMSF (the Fund) shortly thereafter. The individual was the sole member of the Fund. The trustees were the member and his personal assistant (although she had a nil account balance).

The member took a hands-on, ‘one man band’ approach to the management of the Fund in that:

He was responsible for all investments and decision-making
He completed the accounts and up until 2009, audited the accounts
He provided market valuations of the Fund assets
He relied on his own professional experience and knowledge rather than seeking advice on matters

In 2009, the Fund acquired 100 shares from the member in a related company for $100,000.

The member argued that the $100,000 was market value, as this was his valuation, and he was an experienced valuer, having conducted valuations in the past as part of his business. The Commissioner disagreed, arguing that the market value was much higher, particularly given the related company’s retained profits were over $400,000. The Commissioner also submitted that the acquisition contravened section 66 and Part 8 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), being the in-house asset rules.

The member relied on an article he read on the operation of reg 13.22C of the Superannuation Industry (Supervision) Regulations 1994 to assert that the shares were exempt from being in-house assets. The member also maintained a ‘suspense account’ to record advances to and from him and the Fund, and gave evidence that this was an acceptable accounting practice. These loans were typically not documented or recorded as such. He also made no effort to keep the assets of the Fund separate from his personal assets until an independent auditor was appointed.

Decision

The AAT agreed with the Commissioner and found that the acquisition of the shares in the related company contravened section 66 and the in-house asset rules. In relation to the issues concerning the operation of the Fund, the AAT found that the member/trustee contravened section 35A (obligation to keep full accounting records of the fund’s transactions), section 65 (prohibition on lending to members) and section 62 (the sole purpose test).

The AAT found that the number and nature of the contraventions were very serious, and this seriousness was amplified by the standing of the member as an experienced accountant, registered tax practitioner and registered company auditor. Accordingly, the AAT affirmed the Commissioner’s decision to make the Fund non-complying.

In relation to disqualification of the member as a trustee of an SMSF, the AAT noted that the non-compliance decision (and the tax implications thereof) was an appropriate penalty for the contraventions, but notwithstanding the adequacy of this financial penalty, an upholding of the member’s disqualification could still be supportable if the financial penalty could not satisfy one of the purposes of disqualification, namely protecting society against future contraventions.

The AAT also noted the size of the monetary penalty, the attempted rectification of the breaches, and the member’s willingness to provide appropriate undertakings and the assessment of a highly unlikely future compliance risk. Accordingly, the AAT reserved its decision in relation to the disqualification, finding that this was dependent on a suitable and appropriate form of undertaking, to be discussed at a future directions hearing.

Take home messages

This case reinforces the serious consequences that can occur as a result of breaching the SIS Act and that the ATO (and the Courts) are not afraid to issue serious penalties. As such, SMSF trustees must ensure that conduct their affairs in a complying manner, especially in relation to related party dealings. This particularly applies to accounting, financial planning and legal professionals who will often be held to a higher standard.

To discuss or for further information please contact:

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