18/09/2009

A recent decision by the Administrative Appeals Tribunal in JNVQ v Commissioner of Taxation provides SMSF trustees with a timely reminder of the importance of super law compliance and the seriousness of a fund becoming non-compliant.

In July 2008, the Tax Office issued a notice of non-compliance to husband and wife trustees of an SMSF following a breach of the in-house asset rules in 2004.  The trustees had lent money to a related company to prevent the company from becoming insolvent.

At one point the loan value amounted to more than 95% of the total value of the funds assets, this being substantially more than the 5% cap allowed under the in-house asset rules and therefore a breach of super law.  The company did not repay the loan in full until March 2009.

The trustees sought review of the Tax Office’s decision by the Tribunal.   The Tribunal found in favour of the Tax Office, basing its decision on factors such as the extent of the breach, the time taken to repay the loan and the fact that the husband and wife pursued other investments with funds that may have been used to repay the company debt.

As a result of the fund becoming non-compliant, fund income is subject to a tax rate of 45% instead of the concessional rate of 15%.  Further, the fund’s assets are also taxed to allow the Tax Office to recoup all the previous tax concessions received by the fund.