AAT upholds penalties on SMSF over breaching borrowing restrictions

The SMSF had applied for a review of the Commissioner of Taxation’s decision of 17 August 2020.

In this case, the auditor of the fund submitted an auditor contravention report for the 2017 tax year, which identified that the SMSF had borrowed $220,000 in contravention of section 67(1) of the Superannuation Act.

The ACR recorded that the borrowing, and the contravention, had been recorded in a fiscal management report in 2015. It was said that the loan would be restructured correctly, in line with the correct form for limited recourse borrowing arrangements (LRBA). 

A period of time was allowed for that to happen and to fix the problem; however, the problem was not fixed, and eventually, the report was lodged with the Commissioner in 2018.

The Commissioner then imposed penalties for three separate contraventions of s 67(1) for each of the 2015, 2016 and 2017 tax years. The total penalties imposed were $31,800. The penalty for the 2015 year was $10,200, and for the other years, respectively, was $10,800. This was because the value of a penalty unit increased from $170 to $180 in 2016.

On 11 July 2019, the Commissioner remitted the penalty in part. The penalty was remitted to $7,500, representing a little less than 25 per cent of the total penalty that had been imposed. 

On 20 November 2019, the SMSF objected to the Commissioner’s decision. On 17 August 2020, the Commissioner then disallowed the objection, and in October 2020, the fund filed an application with the tribunal, asking the tribunal to review the Commissioner’s decision disallowing the objection.

Sladen Legal senior associate Phillippa Briglia said that in reaching their decision to affirm the Commissioner’s decision (and the penalty), the AAT had observed that the fund had a poor tax compliance history, and even at the time of the AAT hearing, the borrowing contravention had not been fully rectified.

“The fund has had about six years to rectify those contraventions. It had not done so after three years, and it appears not to have taken any steps to do so until very recently. It is also significant that in June 2019, an enforceable undertaking was entered into, which would have seen compliance completed by 1 November 2019,” the AAT said.

“This did not happen, it is said, because it was too ambitious due to the various exigencies of the accounting practice with which the fund was associated and which later acquired the fund, including staff turnover, the development of or the introduction of new software and so on. They might explain but do not excuse the contraventions.”

Ms Briglia noted the fund had also failed to comply with the terms of an enforceable undertaking it had entered into with the Commissioner. The fact that there were “no consequences” resulting from the contravention did not lessen the seriousness of the contravention. 

Further, the SMSF failed to provide any evidence that the penalty was oppressive or unjust.

“This case illustrates the importance of rectifying breaches of the SIS Act, especially when seeking remission of penalties from the Commissioner,” Ms Briglia explained.

“It also shows that the courts will uphold penalties issued by the Commissioner on SMSF trustees for contraventions of the SIS Act, including contraventions of the borrowing provisions.”