Four SMSF breaches high on the ATO’s radar

.

Australia’s contingent of around 630,000 self-managed super funds (SMSFs) is now managing more than $1 trillion in assets.

It’s a very sizeable amount and, according to the Australian Taxation Office, which oversees the SMSF industry, the vast majority of SMSF trustees “are doing the right thing”.

The ATO’s Deputy Commissioner, Superannuation & Employer Obligations, Emma Rosenzweig, told attendees at the SMSF Association 2025 National Congress last week that between 96% and 97% of fund trustees who have lodged their annual tax returns have not had any contraventions reported by their auditor.

But that leaves 3% to 4% of trustees who are in breach of superannuation regulations, with Rosenzweig noting “the amount of super savings at risk is not insignificant”.

“There was a 10% increase in funds with contraventions recorded during the 2024 income year, and for the first half of this current year we've noted a further increase in contraventions of almost 13% compared to the same time last year,” she said.

So, where are some SMSF trustees going wrong? Here are four key areas the Deputy Commissioner said that the ATO was actively watching and, where warranted, undertaking enforcement action.

Illegal early access

Rosenzweig said that beyond administration issues, mostly related to market valuations on assets, the biggest problem on the ATO’s contraventions hit list is SMSF members illegally accessing their super.

“The issue continues to be a significant concern to us, with our latest estimate of the amount illegally accessed either blatantly, or through loans, being $481.8 million.

“It's a small, but ultimately a significant increase from the 2021 estimate in the overall amount, showing that some trustees continue to treat their SMSF as a convenient source of funds.

“Over the last few years, we've been scaling up our compliance action to address this heightened risk. Individuals who access their retirement savings before a condition of release has been met not only impacts their retirement income, but also the integrity of the system.”

We will disqualify a trustee where we are concerned that allowing the individual to continue in the system presents a future compliance risk, compromising retirement savings.

Illegal loans to members

The Deputy Commissioner said the ATO is also seeing “worrying levels of breaches” of conditions of release through loans to members.

She said loans to members are prohibited by the SIS Act and constitute a serious contravention, which is subject to a penalty of up to $19,800 for each contravention.

“We've seen some advice from advisers that implies that if the early access is done in the form of a loan, that it’s somehow less bad,” Rosenzweig said.

“Even more worryingly, we’ve seen some suggestions of ways to retrospectively make an illegal access of superannuation look like a loan by putting in place documentation that is backdated – behaviour which could constitute fraud.

“I'd like to remind you that a loan to a member is just as serious a breach as accessing benefits early without having a loan agreement in place. Neither of these breaches of the SIS Act should be encouraged.

“An SMSF cannot be used to prop up the cash flow of your business, to pay for a holiday, a car, or worse, to support a gambling pattern.”

Rosenzweig said the ATO’s estimate of loans to members that are in breach of the SIS Act is $231.7 million this financial year, which is a 10% increase on the year before.

Non-lodgement of annual returns

Non-lodgement of SMSF annual returns also continues to be a concern for the ATO.

“Lodgement is a basic expectation if choosing to run your own super fund,” the Deputy Commissioner said.

For the 2023 income year there are approximately 85,000 funds that are still yet to lodge their annual return, with approximately 54,000 SMSF annual returns still outstanding for the 2022 income year.

“So, while I mentioned earlier that only 3% to 4% of SMSFs have a contravention reported, that’s only based on those who have actually lodged and we expect a significantly higher proportion of non-lodgers have contravened the regulatory rules.

“For example, we know that long lodgement is a serious red flag for illegal early release. This is especially the case for newly established funds who haven't lodged their first return.”

Rosenzweig said there are still just over 4,500 funds established in the 2023 income year who have not lodged their first return.

“For those who missed the annual return lodgement due date and don’t contact us, their fund will no longer display as complying. Instead, their regulation details will be removed. Removal from the register means that rollovers can’t occur to that fund and employers may stop contributing.

“If an employer can't confirm the compliance status of a fund, then they're putting their own compliance with SG obligations at risk and are likely to refuse to pay contributions to that SMSF.”

Ignoring excess contribution release authorities

Rosenzweig added that the ATO had also observed SMSF trustees ignoring authority notices from the tax regulator to release excess contribution amounts from their fund.

“This means that super is being taxed concessionally when it shouldn’t be, and there are consequences for this. For trustees who fail to release the nominated amount, a non-compliance penalty with a maximum of 20 penalty units or $6,500 may be incurred.”

“Sadly, it's a similar story with commutation authorities where we’re observing similar instances of non-response by SMSF trustees where the member has exceeded the transfer balance cap and we’ve sent them an excess transfer balance determination.”

The Deputy Commissioner said trustees need to ensure they’re following these legal requirements and respond within the required time with the required actions as set out in the ATO’s notices.

“Not doing so might affect the SMSF’s entitlement to exempt current pension income and trustees might also be liable for penalties or subject to compliance action.”

SMSF trustee disqualifications

About 660 SMSF trustees have been disqualified so far this financial year, according to Rosenzweig.

“Disqualification is extremely serious and we will disqualify a trustee where we are concerned that allowing the individual to continue in the system presents a future compliance risk, compromising retirement savings.

“The disqualification of a trustee is enduring and effectively forces the person out of the SMSF system.

“The disqualification of an individual from acting as a trustee or a director of a corporate trustee is published in the ATO’s Disqualified Trustee Register, and it’s also published in the Federal Register of Legislation, where individual names remain permanently on the public record.

“That can impact more than just an individual’s ability to be a trustee ever again, but it can also affect their personal and professional reputation and potentially even careers.”

^{General advice warning}

^{Vanguard is the product issuer and the Operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270 is the trustee of Vanguard Super (ABN 27 923 449 966) and the issuer of Vanguard Super products. We have not taken your objectives, financial situation or needs into account when preparing this report so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs and the disclosure documents of any relevant Vanguard financial product before making any investment decision. Before you make any financial decision regarding a Vanguard financial product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the TMD of a Vanguard financial product before making any investment decisions. You can access our IDPS Guide, Product Disclosure Statements, Prospectus and TMD at vanguard.com. au or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This report was prepared in good faith and we accept no liability for any errors or omissions.}

Vanguard
27 February 2025
vanguard.com.au