MANAGING SUPER FUNDS: Breach of rules can lead to imprisonment

Posted on May 29th, 2009

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A fund must be deemed a super fund under the superannuation laws for contributions to be tax-deductible and the fund concessionally taxed.

The strategy of tax planning through super funds is a simple one – you contribute as much as possible to a super fund whose income is then subject to, at most, 15 per cent tax, and in due course withdraw the contributions and income as a tax-free pension or lump sum.

However, the government imposes a quid pro quo. It expects that the super fund will be managed in accordance with its rules. The tax office regulates self-managed super funds. If a fund fails to comply with the requirements and becomes a non-complying fund, it will lose its ability to accept tax-deductible contributions and will not be taxed at concessional tax rates. Penalties can also be imposed on trustees and others.

The tax office appointed an auditor to one fund after deciding it was non-complying by having failed to keep proper accounting records. The trustees had felt that a small, single-member fund should not have to comply with those regulatory provisions. They were wrong; as a consequence the tax office could quite clearly deem the fund to be non-complying. In this case, the trustees of the fund had to roll over the fund into an industry, retail or public-offer fund, forfeiting their ability to manage their own superannuation.

A regulated fund, with limited exceptions, must not intentionally acquire an asset from a related party of the fund. A trustee or investment manager who intentionally breaches this rule can be imprisoned for up to one year.

The tax office claims that it first wants to educate trustees, and that penalties are only necessary where non-compliance or ‘game-playing’ with the law is intended.

Contact your solicitor for information on super funds.

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