The AAT has affirmed that a SMSF was a non-complying fund for the year ended 30 June 2005 and that a deduction was not available for the misappropriation of funds by a trustee. Further, it affirmed that the base penalty of 75% of the shortfall was appropriate given the circumstances of the breach.
The taxpayer was a trustee of an SMSF along with her husband. Between 9 May and 6 June 2006, an amount totalling $3,460,000 was removed from the SMSF cash management account and transferred to the overseas bank account of the husband. At the time of the transfer, neither the taxpayer nor her husband had reached their preservation age, and no condition of release for the payment of benefits had been met. In addition, no income tax return for the SMSF was lodged for the 2005 year. The Commissioner issued a notice of non-compliance, notice of income tax assessment, and a notice of penalty assessment on the taxpayer in relation to the transfer. The taxpayer broadly argued that she was not liable to pay tax (as a trustee or otherwise) on income stolen from the SMSF by her husband.
The AAT held that, even though it was difficult not to feel sympathy for the taxpayer, the SMSF was a non-complying fund for the year ended 30 June 2005 as it had failed to pass the test in s 42A(5) of the SIS Act. Further, it held that no deduction was available for the misappropriated funds to reduce the taxable income of the fund as the requirement in s 25-45 of the ITAA 1997 was not satisfied (as it was not misappropriated by an employee or agent). In relation to penalties, the Tribunal held the 75% shortfall penalty was appropriate given the “flagrancy of the breach by the trustee of the Fund as an entity”.
(AAT Case [2011] AATA 940, Re Shail Superannuation Fund and FCT, AAT, Ref No 2010/0950, Hughes M, 23 December 2011.)
[LTN 1, 4/1]