Written by: Eloise Turnbull and Damon Jones, SMSF & Superannuation (Updated: 4 November 2026)
Most SMSF breaches aren’t deliberate. They start with a cash crunch, a family arrangement or a paperwork shortcut. Here are the ones the ATO sees most often, and what they can cost trustees personally.
Running a self managed super fund gives you control, but it also makes you personally responsible for the fund’s compliance. Every trustee, or every director of a corporate trustee, is accountable for how the fund is run, even when an accountant or adviser handles the day to day work.
When an SMSF auditor finds a breach that meets the reporting criteria, they must report it to the ATO in an auditor contravention report. Many of the breaches that end up in those reports follow the same handful of patterns. Knowing what they are is the easiest way to avoid them.
Money reaching members before retirement
Loans and financial assistance to members. An SMSF cannot lend money to a member or a member’s relative, or give them any other financial assistance, such as guaranteeing a personal loan. In practice this often happens informally: the fund pays a member’s personal bill, or a member “borrows” from the fund account during a tight month and plans to pay it back.
The ATO has said that many breaches first reported as loans turn out, on closer review, to be illegal early release of super. That distinction matters. Where money is released to a member who hasn’t met a condition of release, the amount is included in the member’s assessable income and taxed at their marginal rate, even if they repay it. The money also can’t simply be put back. Any attempt to return it is treated as a new contribution.
Paying benefits too early, or pensions too late. Paying benefits before a member meets a condition of release, such as retirement or reaching 65, is a breach in its own right. At the other end, a fund paying an account based pension must pay at least the minimum amount each year. Missing it can mean the pension is treated as having stopped for tax purposes.
Dealing with family and related parties
Buying assets from related parties. An SMSF generally cannot acquire assets from a member or other related party. The main exceptions are listed securities and business real property bought at market value. Buying a residential property, artwork or other collectables from a family member is a common breach.
In-house assets over 5 per cent. Loans to, investments in, and leases to related parties are generally in-house assets, and they cannot exceed 5 per cent of the market value of the fund’s total assets. Investments in related unit trusts and loans to related companies are the usual culprits. If the limit is exceeded at 30 June, the trustees must prepare a written plan before the end of the following financial year to bring the level back to 5 per cent or less, and then carry it out.
Arm’s length dealings. Every investment must be made and maintained on arm’s length terms. Leasing a property to a family business at below market rent, lending to a related entity on non-commercial terms, or receiving services for free can all be a problem.
The tax consequence can be the bigger hit here. Income from a non-arm’s length arrangement can be taxed as non-arm’s length income at 45 per cent. Since amendments that received Royal Assent in June 2024, income taxed this way because of a fund-wide (general) expense is capped at twice the difference between the expense actually charged and an arm’s length amount. Where the non-arm’s length expense relates to a specific asset, however, all income from that asset can still be taxed at 45 per cent.
The sole purpose test. The fund must be maintained solely to provide retirement benefits. Members or relatives getting a present day benefit from fund assets, such as staying in a holiday unit the fund owns or hanging fund artwork at home, breaches this test.
Structure, borrowing and paperwork
Separation of assets. Fund assets must be kept separate from members’ personal and business assets. Holding fund investments in a member’s personal name, running fund money through a personal or business account, or failing to update property titles are common. These breaches are often careless rather than deliberate, but they make it much easier for a loan or early release breach to follow.
Borrowing. An SMSF generally cannot borrow money. The main exception is a compliant limited recourse borrowing arrangement, which comes with strict rules. For example, borrowed money can be used to repair or maintain the asset but not to improve it. Overdrawing the fund’s bank account is also a borrowing breach, and giving a charge over fund assets is separately prohibited. For arrangements entered into on or after 10 August 2026, a limited recourse borrowing arrangement can no longer be used to buy real property that is not business real property, which in practice rules out residential property. Arrangements that existed before that date, and their refinancing, are not affected.
Trustee and structural issues. Every member must generally be a trustee, or a director of the corporate trustee, and every trustee must be a member. Problems arise when a member resigns as a director but stays in the fund, when a disqualified person acts as trustee, or when a new trustee doesn’t sign the ATO trustee declaration within 21 days. Members who move overseas also need to watch where the fund’s central management and control sits, as the fund can lose its status as an Australian superannuation fund.
Contributions and investment strategy. Accepting contributions the fund isn’t permitted to accept is a breach. The fund must also have a written investment strategy that the trustees review regularly, and that considers diversification, liquidity and insurance for members. Strategy breaches are rarely enforced on their own but often appear alongside other breaches.
What the ATO can do
The ATO has a range of tools, and the response usually reflects how serious the breach is and how the trustees have behaved. These include:
- An education direction, requiring trustees to complete an approved course
- A rectification direction, requiring trustees to take specific steps to fix the breach within a set time
- An enforceable undertaking, where the trustees commit in writing to fix the problem
- Administrative penalties of up to 60 penalty units for breaches such as lending to members, borrowing and in-house asset breaches
- Disqualification of a trustee, which is published on the public record
- A notice of non-compliance for the fund
Administrative penalties must be paid by the trustees personally. They cannot be paid or reimbursed from the fund. Where there are individual trustees, each trustee can be penalised separately. Where there is a corporate trustee, the directors are jointly and severally liable for the penalty.
Non-complying status is the most serious outcome. In the year a fund becomes non-complying, the market value of its assets (less certain contributions) is included in its assessable income and taxed at the highest marginal rate, currently 45 per cent. Civil and criminal penalties can also apply to the most serious breaches, including breaches of the sole purpose test, lending to members, related party acquisitions and borrowing.
Already found a problem? Act early
If you suspect your fund has breached the rules, or your auditor has raised a concern, the worst approach is to wait and hope. Breaches tend to get harder and more expensive to fix the longer they run, and an issue left unaddressed may be reported in the next audit anyway.
The ATO has said it takes voluntary disclosure into account when deciding what action to take and whether to reduce penalties. Coming forward with a clear explanation of what happened and a plan to fix it puts trustees in a far stronger position than having the ATO find the problem first. Getting advice before you approach the ATO helps make sure the breach is properly characterised and the fix actually resolves it.
If you’re unsure whether your fund has a compliance issue, or you’ve received a contravention report or a letter from the ATO, contact Greenhalgh Pickard to talk through your situation.
Sources
- Australian Taxation Office: What are the SMSF investment restrictions?
- Australian Taxation Office: Illegal early access to super
- Australian Taxation Office: Our SMSF non-compliance actions
- Australian Taxation Office: LCR 2021/2 Non-arm’s length income, expenditure
Disclaimer: This article is general information only and does not constitute legal, tax or financial advice. It does not recommend acquiring, holding or disposing of any financial product. You should obtain advice specific to your circumstances before acting.
Greenhalgh Pickard’s Litigation, SMSF & Superannuation Team
