SMSF Adviser published an article by Deanne Firth of Tactical Super that I feel should be retained to provide to SMSF trustees who complain about having to justify their related party transactions.

Essentially, a member drew loans, in multiple tranches over three years, totalling $90,000. Each tranche incurred an administrative penalty resulting in a total penalty of $616,200. These are strict liability offences so the ATO does not have to prove anything except that they happened.

Significantly, the penalty amount would have been $2,464,000 if the fund had not had a corporate trustee.

After negotiation, the ATO reduced the penalty to $109,000 to be paid by the directors of the corporate trustee personally. In addition the whole of the $90,000 was added to the member’s assessable income in a single year and taxed personally at their marginal rate.

There are a few lessons here. Obviously trustees should be aware of their obligations but, failing this,

• a daily SMSF administration service would have picked up the problem after the first tranche
• the damage would have been reduced if the accounts had been lodged earlier – thus illustrating the reason why the 3 year audit proposal is crazy
• a corporate trustee should be mandatory for all SMSFs

The full article is available here.