The trustees of a non-complying SMSF whose tax bill was set to increase by an incredible 1,700% have made a lucky escape via tribunal.
According to an ATO statement, the Pabian Park Pty Ltd Superannuation Benefits Fund had been a complying superannuation fund for a number of years, which entitled it to concessional tax treatment.
However, the trustees of the fund were also directors of Pabian Park Pty Ltd, to which the Fund made certain loans in 2007.
The ATO Commissioner found that the fund had breached the SIS Act in 2008 because the loans were 'in-house assets' representing more than 5% of the market value of fund assets. The Commissioner accepted an undertaking that the loans would be repaid by 30 September 2009.
The loans were not repaid by the agreed date, however, so the Commissioner issued a notice of non-compliance for the 2006 income year. The fund, therefore, lost the benefit of concessional tax rates, and was assessed for additional tax for the 2006 and 2007 financial years.
As a result of the fund becoming non-complying, its taxable income increased from $56,361 to $309,827, with gross tax increasing 17-fold from $8,454.15 to a huge $145,618.69.
The fund trustees sought a review of the decision to issue the notice, but the ATO Commissioner confirmed his decision. They therefore applied to the Administrative Appeals Tribunal (AAT) for further review, which set aside the Commissioner’s decision for several reasons, including:
According to subsection 40(1), paragraph 42A(5)(b), of the SIS Act the Commissioner as the regulator must consider: tax consequences arising from the fund being treated as non-complying; seriousness of the contraventions; and 'all other relevant circumstances'.
The factors specified in paragraph 42A(5)(b) are 'equally relevant' in exercising the subsection 40(1) discretion to issue a notice of non-compliance.
The adverse tax consequences were significant and that this would leave the trustees with minimal savings in their fund.
While the trustees clearly breached the SIS Act in making unsecured loans to Pabian Park, did not appreciate the significance of their regulatory breaches, did not comply with their undertaking and did not try to repay the loans at the earliest possible opportunity, these breaches were 'serious but they were not wilful'.
The tax consequences of the issue of the notice were likely to deplete most of the assets of the fund, the age of the trustees left little opportunity to rebuild retirement savings, the trustees did rectify the breach (though not in a timely manner) and there was no previous non-compliance.
“The Tribunal accepted (consistent with PS LA 2006/19) that the discretion is to be exercised taking into account the objects of the SIS Act , and noted that the case was 'finely balanced' . Failure of the Applicants to appreciate the seriousness of the issue was a 'serious error of judgment', but it would be 'disproportionately harsh not to exercise the discretion in their favour' . The Tribunal concluded that, 'weighing up all the factors', it would 'not be inconsistent with the objects of the SIS Act to exercise the discretion in favour of the Fund' ,” said the ATO statement.
“Although the Tribunal reached a conclusion different to the Commissioner on exercise of the discretion, it is acknowledged that the case was finely balanced and that it was open to the Tribunal to reach its decision on the facts as found. In doing so, the Tribunal also accepted and followed the general approach taken in PS LA 2006/19.”
SMSF investors can’t get enough of residential property
SMSF tax trap: pensions ruling opens ‘Pandora’s box’