The steep penalties guarding against bending SMSF rules

There are many situations where the trustees of self-managed superannuation funds could be tempted to bend SMSF rules.

These range from a simple backdating of relatively innocuous records, all the way to trying to hide a deliberate breach of key regulations.

A particularly serious breach occurs when trustees fail to organise an audit of their fund, including the additional audit required when it is paying account-based pensions to its members out of a single pool of assets.

Sidestepping may be prompted by a desire to hide transactions that may trigger an adverse audit report, or simply because the trustees want to save money.

That the tax office takes a dim view of this was highlighted recently when an SMSF trustee was fined for claiming on the fund's annual return to the ATO that a particular auditor had been appointed when, in fact, no auditor had been appointed nor an audit conducted.

Imposing the $3000 fine, the ATO warned it constantly carried out reviews and data matching.

The provisions that impose penalties for this offence have been expanded, so false and misleading statements that don't result in any underpayment of tax are now also covered.

This applies to all statements to the ATO made from June 4 last year.

Basic penalties that can be imposed range from $2200 to $6600, but the tax office is able to increase or reduce or even cancel the penalties. In particular, there is unlikely to be a penalty if your SMSF took reasonable care and so only inadvertently made a false or misleading statement.

Similarly the penalty usually will be waived if the statement was the result of your SMSF following tax office advice or if you, as trustee, voluntarily disclose the false or misleading statement before you are contacted by the tax office about it.

The tax office guide includes an example where a significant breach occurs and how the subsequent co-operation of the trustees affected the final penalty that was imposed. In the case in question, an SMSF is audited for the 2009-10 financial year, the auditor doesn't identify or report any contraventions of the law, and the trustees lodge the fund's annual return stating this finding.

The fund is subsequently audited by the tax office, which discovers the fund had in fact bought an asset from a related party, and paid well above market price.

These facts were not apparent to the original auditor as the trustees had altered the relevant documentation to hide the true nature of the transaction. They argued it was a good investment and so felt the alteration of the documents wasn't that serious.

In the end the trustees were forthcoming and co-operative during the audit. While the seriousness of the rule breach meant the base penalty could not be reduced, this behaviour did mean the tax office refrained from imposing additional penalties, something it could quite easily have done.

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