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SMSF : Breaking the rules

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Managing non-compliance in Self-managed superannuation funds [SMSF’s]

In Australia, there are approximately 1 million members in 600,000 SMSFs with combined assets exceeding a staggering $750 billion.  As the numbers of funds, members and wealth of SMSF increases so does the number of non-compliant funds.

Breaking the rules

While most Trustees run compliant funds, there are some that are non-compliant.  The price of non-compliance can be high with penalties ranging from directions to undertake education courses about managing an SMSF to fines and even imprisonment.

Some SMSF Trustees break the rules inadvertently by simply lacking a full appreciation of their obligations around managing the SMSF.  For example, Trustees not managing reporting requirements promptly or failing to appoint an auditor every financial year because the Trustee mistakenly believes it unnecessary because no contributions or payments were made.  In the eyes of the law, ignorance is no defence and SMSF Trustees should take the time to understand their obligations.

That said, some Trustees know they are breaking the rules but for a variety of reasons do it anyway.  This is the story of a client called Bob*.  Bob falls into the latter category of Trustee – he knew he was breaking the rules but thought it was no big deal.  He:

  1. Set up an SMSF with under $250,000;
  2. Failed to lodge the SMSF’s annual returns for a number of years;
  3. Failed to have the fund audited for a number of years;
  4. Used the cash in the SMSF to purchase a property in Bob’s personal name where he lived at times and rented at others. There was also a loan in his name secured by mortgage against the property; and
  5. Rental income was paid to a bank account in the name of the SMSF.

Bob had no other assets.  He wanted to buy himself a house which he could rent or live in.  Bob’s rationale was that as he was managing the fund and as it was ‘his money‘, it made sense for him to use the SMSF fund to help him out.  He believed that no one would even need to know and that he would be in a position to ‘fix it all up’ at some point in the future.

After a few years, Bob had not fixed the problems instead he added to them by doing nothing.  Eventually, Bob approached an accountant who confirmed that he had breached many SMSF rules and that he risked fines, losing the property and even (although highly unlikely) going to prison.  The accountant urged Bob to seek legal advice urgently.

We were able to provide advice to Bob and work with other professionals with a view to minimising the potential negative consequences and alleviating the worry for Bob as well as getting his super back on track.  However, this remains a cautionary tale because although the outcome could have been significantly worse, due to his circumstances, Bob did end up selling what had become his home in order to amongst other things, replenish the SMSF and pay out the mortgage.

*Not real name*

And the moral of Bob’s story?

That’s easy… Don’t break the rules…

SMSF Trustees should familiarise themselves with the rules and laws so that they can avoid, as much as possible any breaches.  If you are not sure about whether something breaks the rules, seek advice before you do it.

But if you have broken the rules then …

  • Be proactive – it really will help!
  • Managing any non-compliance carefully from the outset is critical. Obtaining good legal and accountancy advice about any potential breaches may assist to reduce the severity of any penalties that might be imposed.
  • Call us for a confidential discussion about how to minimise your exposure to risk and negative consequences.


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Don’t hesitate to contact CRH Law. We have helped many people in the same situations as you’re probably in. We hope to hear from you soon.

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