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The secret to SMSF compliance

There are many reasons why SMSF trustees put their hands inside the SMSF cookie jar and help themselves. The most common ones are a failing business that requires a cash-flow injection or being in desperate need of funds to meet everyday financial commitments.

Regardless of the circumstances, the superannuation rules are clear: the sole purpose of an SMSF is to provide retirement benefits for members and their beneficiaries.

Any fund transaction that doesn’t meet this requirement will fail the sole purpose test with potentially devastating consequences.


The recent decision in the Deputy Commissioner of Taxation v Rodriguez [2016] FCA 860 is another case demonstrating the impact of poor decision-making by trustees.

But what’s also important about the outcome of this case is the consideration given by the court to the trustees.

When imposing final penalties, the court took into account specific mitigating factors that included a voluntary disclosure letter and the trustee’s full cooperation with the ATO.

Fabricated loan

The background to the case is that Mr and Mrs Rodriguez were the trustees of the Felix Superannuation Fund established in February 2005.

As early as November 2005, Mr Rodriguez fabricated a loan contract whereby the fund made payments to a fictitious ‘Ms M Mizen’. He initially withdrew a total of $110,179 from the fund for his own personal benefit.

Over several years, he continued to make 31 separate loans and various repayments to the fund, with the loan balance totalling $234,159 as at 30 June 2012.

Illegal early access

The withdrawals were used to meet the financial commitments of Mr Rodriguez’s everyday living and included purchases such as a scooter and gold bars (on two separate occasions) from Perth Mint. The bars were later sold with all proceeds deposited into the trustee’s personal bank account, some of which made their way into the fund.

In 2013, the interest on the loan was calculated at $87,385 and the loan was finally paid in full through a cash payment and an in-specie transfer of shares into the fund.

The court ruled the offence related to unauthorised early release of the fund’s superannuation benefits and the contraventions of the Superannuation Industry (Supervision) Act 1993 included:

• section 62 – sole purpose test,
• section 65 – making loans and financial assistance to a member,
• section 83 – failure to comply with the 5 per cent in-house asset limit, and
• section 82 – failure to make a written plan to dispose of the in-house asset.

Falsified documents

It was further found the trustee deliberately set out to conceal the purported Mizen loan as the loan documentation was set up to ensure the arrangement appeared to be on commercial terms and at arm’s length.

In addition, the documentation and the purchase of the gold bars were designed to avoid the scrutiny of the fund’s auditor. This enabled the trustee to continue with the offending behaviour until the auditor qualified the fund in 2011.

The trustee was advised of an ATO audit in February 2013 for the 2005 to 2011 financial years. In early March 2013, Mr Rodriguez confessed to his accountant that there was no loan to Ms Mizen and, soon after, a voluntary disclosure letter was sent to the ATO.

SMSF penalties

The court was in a position to apply the maximum penalty for each contravention, which was $360,000 (section 196(3) read with section 4AA of the Crimes Act 1914).

There are many examples of case law history (such as Olesen v Early Sunshine Pty Ltd [2015] FCA 12 and FCT v Ryan [2015] FCA 1037) where previous penalties imposed for similar offences have been between $10,000 and $35,000. In this case, however, the court was not limited to the top figure in that range.

The court noted the contraventions were serious and deliberate, but took into consideration specific mitigating factors such as:

• the trustee’s full cooperation with the ATO and its officers,
• no past record in terms of similar contraventions,
• amounts that had already been paid by way of compensation or legal costs,
• contrition – a full apology had been made,
• the trustee’s personal history, particularly financial,
• steps had been taken to rectify the harm,
• there was no likelihood of repetition, and
• the good character of the trustee.

As a result of the trustee’s willingness to cooperate, the ATO reached an agreement with the trustee prior to the court ruling. The final court orders reflected that agreement and Mr Rodriguez was barred from acting as a trustee and received a monetary penalty of $40,000 plus costs of $14,000.

Early engagement

The lesson for SMSF advisers is while this case represents one of the most deliberate acts of dishonest behaviour from an SMSF trustee, early engagement and cooperation with the ATO will ensure a better outcome.

There’s no doubt some SMSF advisers may find it difficult to take this step, especially when the prime directive is to protect their SMSF clients.

But there comes a time when working collaboratively with the ATO (and your SMSF auditor) through voluntary disclosure can strengthen that protection by rectifying contraventions and getting the fund back to complying status.

That’s the secret to SMSF compliance.

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