As the regulator of the SMSF industry, the ATO has historically taken an educational approach to compliance since taking on the role. As a part of the educational approach to this the ATO would generally give SMSF trustees the opportunity to rectify breaches of the law, with the condition that the breaches did not happen again.
This approach may have been taken by the ATO as their only method of punishing a SMSF or its trustees was to make the fund non-complying, with the end result potentially being half of the fund value being paid in tax as well as all of the income of the fund being taxed at the top marginal tax rate.
The introduction of the trustee penalties from 1 July 2014 gave the ATO more options in penalising trustees for breaches of the law, which included requiring the trustees to undertake education in relation to their roles as trustees or potentially financial penalties on the trustees themselves.
In recent times the ATO have also been disqualifying trustees from being trustees of a SMSF as a part of the penalties handed down when breaches are reviewed. The disqualification of the trustee results in the SMSF no longer meeting the definition of an SMSF. The only options available to the SMSF trustees at that time are to roll the superannuation benefits to another complying fund or convert the fund to a small APRA fund. Either option generally comes at significant cost and a loss of control to the SMSF members.
The investments of the SMSF may also include the business premises that the members operate their business out of, which may require a forced sale and potential disruption to business activities.
The most common reason the ATO are disqualifying trustees is when the fund is lending money to members or related parties of the fund in breach of the legislation.
When considering investing the funds of the SMSF trustees need to consider the investments as if they are investing someone else’s superannuation. If trustees are concerned about the potential impact of an investment professional advice should be sought before making the investment.