Newsletter No. 7, July 2013

Non-compliance in the first year of establishment

In my Newsletter No 5, May 2013, I explained what can happen if your SMSF receives a notice of non-compliance from the Australian Taxation Office (ATO).  The example I used to illustrate this was where the SMSF had been established for five years.   One of my readers wanted to know what the tax implication is if a SMSF receives a notice of non-compliance in the first year of being established.

Let’s assume you established a SMSF on 15 January 2012 by rolling over your superannuation savings totalling $50,000 which you had with a public superannuation fund. Then after you lodged your SMSF’s first tax return for the financial year 2011/2012, it was discovered by the ATO that your SMSF had contravened a provision of the superannuation law.  You, as a trustee of your SMSF, were unable to rectify the contravention and the ATO after considering your SMSF’s situation and the seriousness of the contravention decided to issue a notice of non-compliance to your SMSF for the financial year 2011/2012.

Once a notice of non-compliance is issued to your SMSF, your SMSF becomes a non-complying superannuation fund. A non-complying superannuation fund cannot accept rollovers from complying superannuation funds.  Therefore, the $50,000 superannuation savings that you rolled over from your public superannuation fund into your SMSF will no longer be treated as a rollover.  Under the Taxation Act, the money will in fact be treated as a superannuation lump sum benefit paid directly to you as a member of the public superannuation fund.  The money will need to be included in your personal income tax return and assessed for tax accordingly.  Any other money deposited into your SMSF such as employer contributions as well as earnings from investments will be taxed at the 45% non-complying tax rate.  Also other tax concessions that were available to a complying superannuation fund will be removed from your non-complying SMSF.  Your SMSF will remain a non-complying SMSF until the ATO issues your SMSF with a notice of compliance.

Disclaimer

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.