What happens if your SMSF becomes non-compliant?
If an SMSF contravenes the superannuation laws, the ATO has a range of enforcement options. The consequences depend on the severity of the contravention and whether it was intentional or inadvertent.
For less serious contraventions, the ATO may issue an education direction (requiring the trustees to complete an approved education course), a rectification direction (requiring the trustees to fix the problem within a specified timeframe), or an administrative penalty. Administrative penalties range from 5 penalty units ($1,820) for minor matters to 60 penalty units ($21,840) for serious breaches such as illegal borrowing, loans to members or in-house asset breaches (penalty unit value from 1 July 2026). They are imposed on each trustee personally and cannot be paid from the fund.
For serious or repeated contraventions, the ATO can issue a notice of non-compliance, which causes the fund to lose its complying status. This is the most severe outcome: the fund’s taxable income is taxed at 45% (instead of the concessional 15% rate), and the market value of the fund’s assets, less contributions not previously included in its assessable income, is included in its assessable income for that year. For a fund with $1 million in assets, this can result in a tax bill of several hundred thousand dollars.
The ATO can also disqualify individual trustees from acting as trustees of any super fund, and can seek civil penalty orders from a court or refer serious offences for criminal prosecution. Trustees who are disqualified cannot be directors of a corporate trustee either.
The most common contraventions that lead to enforcement action include borrowing outside the LRBA rules, providing financial assistance to members or relatives (such as lending fund money to a member), breaching the in-house asset rules (holding more than 5% of fund assets in loans to, investments in, or leases with related parties, other than excluded assets such as business real property leased to a related party), and failing to keep the fund’s investment strategy current. If you suspect your SMSF may have a compliance issue, we strongly recommend engaging a specialist SMSF adviser to assess the situation and, if necessary, lodge a voluntary disclosure with the ATO.
Frequently asked questions
What is the most serious consequence of SMSF non-compliance?
A notice of non-compliance. The fund loses complying status, its income is taxed at 45 per cent rather than 15 per cent, and the market value of its assets, less contributions not previously taxed, is brought to tax in that year. For a fund with $1 million in assets, that can mean several hundred thousand dollars.
What should I do if I think an SMSF has a compliance problem?
Engage a specialist SMSF adviser to assess the position before the annual audit, and consider a voluntary disclosure to the ATO. The ATO treats voluntary disclosure and a credible rectification plan very differently from a contravention first reported by the auditor.
Which contraventions does the ATO see most often?
Borrowing outside the LRBA rules, providing financial assistance to members or relatives such as lending fund money to a member, breaching the in-house asset rules by holding more than 5 per cent of fund assets in loans to, investments in, or leases with related parties (other than excluded assets such as business real property leased to a related party), and failing to keep the investment strategy current.
This article is general information only and does not constitute legal, financial, or tax advice. While we endeavour to keep content accurate and current, laws and regulations change frequently. For advice specific to your circumstances, please consult a qualified professional adviser. CoSec Partners Pty Ltd accepts no liability for actions taken based on this content.