SMSF Trustee Penalties - Hard Lessons

A husband and wife who were trustees of their own SMSF have each been fined $20,000 for 68 lending breaches of the SIS Act.  In total, about $209,000 was withdrawn ($30,000 was repaid) over a four year period.  The ATO accepted their undertaking to repay and wind up the fund and disqualified them as trustees.  Unfortunately, they did not rectify the breaches.  The ATO then commenced action to impose civil penalties.  The Court agreed and imposed on each trustee a $20,000 civil penalty and costs order. 

It seems that the key matters against the trustees were: (1) they had previously contravened the SIS Act; (2) they were aware that the withdrawals were contrary to the SIS Act; (3) there were many separate contraventions; (4) the total amount withdrawn was significant; (5) there was no or little attempt to treat the withdrawals as loans; and (6) they had given an undertaking to the ATO and failed to comply with that undertaking.  In their favour was the fact that they fully co-operated with the ATO.  

What was irrelevant was the reason for the withdrawals – financial necessity arising from the need to service a loan which had been taken out to purchase a now failed business.

There are four important lessons from this case.  First, any unauthorised withdrawal must be rectified as soon as possible by repaying the amount withdrawn and, if possible, with interest.  Secondly, if an undertaking is given to the ATO, the undertaking must be strictly performed.  Thirdly, any form of justification of the actions of the trustees (eg commercial necessity to keep a business afloat) is highly unlikely to favourably influence the ATO.  Lastly, a reluctance to sell assets (wanting better market conditions or desire to retain the asset) which, if sold, could repay the SMSF will not find favour with the ATO.  However, the ATO will accept that a reasonable time may be required to sell real estate – say three or four months but the ATO is unlikely to accept a period greater than six months.

Case reference: Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA 1037