The Federal Court has imposed a $12,500 civil penalty on a trustee of a self-managed superannuation fund (SMSF) for the illegal early release of benefits in breach of the sole purpose test.

The respondent established an SMSF in August 2005 with a rollover payment of $40,032. Shortly thereafter, he began withdrawing amounts to meet pressing financial needs. In total there were 41 illegal early release payments totalling $64,000 during 2006 to 2010. The applicant, in his capacity as a Deputy Commissioner of Taxation (Superannuation), applied to the Federal Court to impose a civil penalty on the trustee under s 196 of the SIS Act.

The Court held that the trustee had contravened ss 62(1) (sole purpose test) and 65(1)(b) (financial assistance to member) of the SIS Act through at least 30 unauthorised withdrawals. The Court imposed a civil penalty of $12,500, after finding that the contraventions were “serious”. However, the Court agreed to treat the contraventions as a single contravening course of conduct and took into account the respondent’s admissions and cooperative conduct. (Olesen v MacLeod [2011] FCA 229, Federal Court, Barker J, 17 March 2011.)

The details of the case show that the trustee was alerted by the fund’s auditor in 2007 that the withdrawals made in 2006 and 2007 were a contravention of the SIS Act. The ATO audited the fund in respect of 2008 and found further breaches yet the trustee continued to make illegal withdrawals in 2009 and 2010. I believe he got off very lightly.