A recent case decision highlights the penalties that may be imposed for incorrectly accessing your super early. The decision made by the judge in the case of Deputy Commissioner of Taxation V Lyons resulted in Mr Lyons having to pay a monetary penalty of $32,500 and the commissioner costs of $5,000. The Fund also lost its complying status, resulting in additional tax being levied on the Fund.
This decision provides various insights for members of self-managed superannuation funds (SMSF).
While the money in your SMSF is for your ultimate benefit there are only limited circumstances in which this money can be accessed before retirement. Eligibility for early release of superannuation needs to be assessed and granted on an individual bases. Some circumstances that are considered are:
- Severe financial hardship (Subject to some limits)
- Terminal illness
- Permanent incapacity
- Balances of $200 or less
- Permanent departure from Australia
In some circumstances compassionate grounds will be granted, some of these include:
- Arrears on your mortgage to prevent your home being sold by your lender
- Modification to your home or vehicle to accommodate a severe disability for you or your dependant’s
- Palliative care for terminal illness for you or your dependant’s
- Expenses associated with your dependant’s death, funeral or burial
Incorrectly accessing benefits before meeting a condition of release can result in significant financial penalties for both the fund and the Trustees. This can be seen in the Lyons case; Mr Lyons suffered financial difficulties in his business and ultimately became bankrupt. In an attempt to keep his struggling business afloat, funds from The Lyons Family Superannuation Fund were borrowed, via a relative. Although these facts indicate Mr Lyons may have met the conditions for severe financial hardship, the benefits were not released on these grounds, leading to several contraventions of superannuation legislation.
When a fund becomes non-complying, tax is imposed at 47% of the Fund’s assets. By a lucky coincidence, The Lyons Superannuation Fund was only taxed 47% on the remaining $3,459.00 in the SMSF at the time it became non-complying, compared to the balance of the fund when the loan was made.
With the new powers provided to the ATO under the new penalty regime that came into effect 1 July 2014, penalties of up to $10,200 per trustee can apply to each breach of superannuation legislation. These penalties cannot be paid from Fund assets and are not tax deductible. This is definitely something that trustees need to be aware of. Mr Lyons was the only one that Deputy Commissioner commenced proceedings against and not Mrs Lyons who was also a trustee.
If you do ever find yourself in a similar situation, it is unlikely that the court will accept “I didn’t know” as an excuse. If you are a trustee, or the director of a corporate trustee of an SMSF, you should ensure you know what is happening with the Fund at all times to prevent being unknowingly caught out by an inadvertent contravention.
If you are considering establishing a SMSF or are in need of advice on an existing SMSF please contact Grange Business Partners, we are happy to help.