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:
| Criteria | Tax implication |
|---|---|
| Tax rate | Set 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 income | Under 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 deduction | Not available |
| Refund franking credit, TFN withheld, and foreign income offset | No credits or offsets can be claimed |
| ATO interest charge | Interest 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 losses | Cannot carried forward |
| Compliance with Superannuation Industry (Supervision) Act 1993 and Superannuation Industry (Supervision) Regulation 1994 | None of the requirements of the Act or Regulation are applicable since the Fund is non-complying |