The value of complying status

A complying SMSF is generally taxed at a concessional rate of 15% on its assessable income, and can access other concessions such as reduced tax on capital gains for Assets held longer than twelve months, and tax-free Earnings supporting certain retirement pensions. Complying status depends on the fund meeting its obligations under Superannuation law year after year.

How a fund becomes non-complying

For serious contraventions, the ATO can issue a notice of non-compliance, making the fund a non-complying fund. This is not an automatic result of any breach; it is a decision the ATO makes in serious cases, taking into account the nature of the contraventions, the trustees' behaviour, and whether the fund has been rectified. It is generally reserved for significant or deliberate breaches, or a pattern of serious non-compliance.

The tax consequences

In the year the fund becomes non-complying, an amount broadly equal to the Market Value of the fund's total assets, less certain contributions, can be included in its assessable income. On top of that, the fund's income is taxed at the highest marginal tax rate rather than the concessional 15%.

A hypothetical example

Consider a hypothetical fund with $900,000 in assets that is made non-complying after serious, unrectified breaches. Because a large amount reflecting the fund's assets can be brought into its assessable income and taxed at the top marginal rate, the resulting tax bill could run well into the hundreds of thousands of dollars. The exact figure depends on the fund's history and circumstances, and this example is illustrative only.

Which breaches carry this risk

The breaches most associated with this outcome are the serious ones: illegal early access to benefits, lending to or financially assisting members, prohibited borrowing, major in-house asset breaches, and running the fund contrary to the sole purpose test. A single error that is promptly fixed is unlikely to lead here — it is deliberate, significant or persistent non-compliance that puts complying status genuinely in jeopardy.

Winding up does not remove the risk

Winding up a fund after a contravention does not stop the ATO taking compliance action, including making the fund non-complying for the relevant year or pursuing penalties against the trustees. The obligations and consequences attach to what happened while the fund operated, not to whether it still exists.

Effect on all members

Loss of complying status affects the whole fund. Because the tax consequences fall on the fund itself, every member's balance is affected, including members who had no part in the breach.

Factors relevant to protecting complying status

Understanding and respecting the core prohibitions, keeping records, meeting lodgment deadlines, and addressing any breach promptly are relevant to protecting complying status. Rectifying a breach and making a voluntary disclosure are factors the ATO weighs when deciding how far to escalate a response.