The AAT, recently, upheld the penalties imposed on an SMSF for borrowing funds in contravention of s 67(1) of the SIS Act – for borrowing from a member, and not rectifying it, for over 3 years.

The facts were these.

  • Sometime in 2015, one of the members of the SMSF borrowed $220,000 from a bank which they on-lent to the fund. The fund had therefore borrowed from the member, in contravention of s67(1) of the SIS Act.
  • A period of time was allowed to restructure the loan, in line with s67A of Act (which deals with limited recourse borrowing arrangements). However, this did not happen and in September 2018 the auditor of the fund submitted an Auditor Contravention Report for the 2017 income year, identifying the contravention of s67(1).

The ATO imposed administrative penalties under s 166 of the SIS Act for 3 separate contraventions of s 67(1) for each of the 2015, 2016 and 2017 income years. The penalties totalled $32,000 but the ATO remitted them (under s 298-20, of Sch 1 to the TAA) to a total of $7,500.

The AAT said that the penalties were not oppressive or unjust and declined to remit them any further, emphasising that:

  • the borrowing was a breach of a significant obligation under the SIS Act that occurred over several years; and
  • the continued failure to deal with and rectify the contravention over the 3 successive income years (2015, 2016 and 2017) was a significant matter that made the circumstances “egregious”.

(FYYB v CofT  [2021] AATA 3567 (AAT, Reitano M, 27 July and 5 October 2021) [LTN 226, 23/11/21]

[Tax Month – November 2021Previous 2021] 24.11.21

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