What are the implications?

A Self Managed Super Fund (SMSF) may become a ‘non-complying’ fund if it fails either the “residency test”, which means the fund is not a resident of Australia or the “compliance test”, when the fund has been issued with a Notice of Non-Compliance from ATO because it does not comply with the SIS Acts or SIS Regulations.

Once the fund becomes “non-complying”, the fund would have disastrous tax consequences, including:

CriteriaTax implication
Tax rateSet by ITAA 1936 section 26, the rate of tax payable by a trustee of a non-complying SMSF in respect of the taxable income of the fund is 47% (including Budget Levy of 2%)
Assessable incomeUnder section 295-325 of ITAA 1997, the assessable income in the first year becomes “non-complying” is calculated as under:
Assessable income = Asset value (-) all members undeducted contributions (+) ordinary income
In the following years when the Fund is still non-complying:
Asssessable income = Ordinary income
Exempt current pension income deductionNot available
Refund franking credit, TFN withheld, and foreign income offsetNo credits or offsets can be claimed
ATO interest chargeInterest accrued can be substantial where the ATO issues the notice of non-compliance in respect of a financial year that has long since passed
Tax losses and capital lossesCannot carried forward
Compliance with Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulation 1994None of the requirements of the Act or Regulation are applicable since the Fund is non-complying