Tribeca’s JUSTINE HARRIS answers your questions in depth.
Question: Can you clarify the taxation treatment when a self-managed super fund (SMSF) is found to be non-complying by the Australian Taxation Office (ATO)? I have recently been told all of the fund’s income from inception is taxed at the 47 per cent penalty rate. This seems very harsh considering the income has already been taxed at up to 15 per cent.
Answer: If a fund is declared non-complying, it will be taxed at 47 per cent of the total value of the assets of the fund less undeducted contributions. The total value of assets is calculated as the market value of the fund’s assets immediately before the start of the year of income (that is, the previous June 30).
Likewise, the value of undeducted contributions is calculated as at the same date. On top of this penalty, the superannuation fund will also be subject to tax on its current year income at a rate of 47 per cent.
This penalty has been in place since 1995-96. Prior to that date, the non-complying fund was only subject to 47 per cent tax on the current year’s taxable income.
As the current provision taxes the growth, and deductible contributions of previous years, as well as the current year, the ultimate tax penalty will often be much greater than 47 per cent.
The ATO has said it will take steps to make a fund non-complying where a SMSF has repeatedly failed to comply with its obligations under the Superannuation Industry Supervision (SIS) Act, there are multiple breaches, or a breach is significant.
If trustees breach the SIS Act or the regulations, the ATO can also:
• accept an undertaking from the trustees to rectify the breach;
• freeze the assets of a fund;
• disqualify trustees;
• suspend or remove trustees; and
• seek civil and criminal penalties through the courts.
Justine Harris is head of professional development, Tribeca .
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