The inability of the ATO to apply penalty provisions for breaches of the sole purpose test should not be viewed as the regulator taking a relaxed view of this behaviour and trustees should be reminded heavy tax burdens can be imposed instead.
Cooper Partners Financial Services director Jemma Sanderson said breaches of the test could result in a civil penalty of up to 2000 penalty units, which at $330 per unit could total $660,000.
However, speaking during a recent presentation hosted by The Auditors Institute, Sanderson noted these could only be applied by a court after an SMSF had failed an ATO audit.
“It is not an automatic penalty from the ATO. It can only be awarded by a court, but it is severe, as is the further penalty of up to five years’ jail, which also requires the court to have ruled the super fund has been in breach of the sole purpose test,” Sanderson said.
“It’s not a bad stick to wave around to get trustees to think about these things, but sole purpose test breaches often go hand in hand with a breach of another provision, which often has to do with in-house assets, non-arm’s-length provisions and borrowings.
“The difference is the ATO is required to automatically apply administrative penalty provisions to a compliance breach for any of those particular provisions and part of their mandate is they can then remit some of those penalties and consider the severity of the breach.
“If there is a sole purpose breach, a consideration is that it may result in the fund being made non-complying because there’s been a breach of those standards and that’s more likely to be an outcome the ATO might pursue rather than going to court to have a civil penalty provision imposed.
“We don’t like funds being made non-complying because what happens then is the assets of the fund at the previous 30 June are now the assessable income of the fund in the following year and taxed at 45 per cent less the tax-free component.
“Losing half your fund in tax is another good disincentive to do the right thing.”
