Most SMSF trustees who end up in trouble with the ATO did not set out to break the rules. A loan to a family company, a return lodged months late or a property used by a relative is usually enough.
This guide covers the mistakes the ATO acts on, how the annual audit finds them and what each one can cost, using penalty units at $364 from 1 July 2026. Every rule was checked against the ATO’s SMSF non-compliance actions, auditor and investment restrictions pages for 2025-26 and 2026-27.
It is for trustees of a running fund. If you are still setting one up, our SMSF setup guide shows how to start compliant.
Key takeaways
- Appoint an approved auditor no later than 45 days before the annual return is due.
- New funds and self-lodgers with overdue returns lodge by 31 October; others by 28 February.
- In-house assets cannot exceed 5% of the fund’s total market value.
- Lending to members or relatives: 60 penalty units ($21,840) from 1 July 2026.
- Penalties are paid personally, never from the fund.
- A non-complying fund’s income is taxed at 45%.
SMSF compliance risks at a glance
| Breach | Rule | Administrative penalty (units) | At $364 per unit |
|---|---|---|---|
| Loan or financial assistance to member or relative | SIS Act s65(1) | 60 | $21,840 |
| Borrowing outside the permitted rules | s67(1) | 60 | $21,840 |
| In-house assets above 5% | s84(1) | 60 | $21,840 |
| Breach of an operating standard, such as the investment strategy | s34(1) | 20 | $7,280 |
| No minutes or records of trustee decisions | s103 | 10 | $3,640 |
| Trustee declaration not signed | s104A(2) | 10 | $3,640 |
| Not giving information to the regulator | s254(1) | 5 | $1,820 |
Source: ATO, Our SMSF non-compliance actions, ATO, Penalty units ($364 from 1 July 2026, $330 before), checked 9 October 2026.
How does the ATO find SMSF breaches?
Mostly through your own auditor. Each year an approved SMSF auditor, registered with ASIC, checks the financial statements and compliance with super law. The ATO’s audit checklist covers the sole purpose test, loans to members, in-house assets, borrowing, the investment strategy and record keeping. Where a breach meets the reporting criteria, the auditor lodges a contravention report, even if you end the engagement.
Late lodgment is the other trigger. The ATO lodgment page says an overdue return can change the fund’s Super Fund Lookup status to regulation details removed, which can stop rollovers and employer contributions.
What are the most common SMSF compliance mistakes?
1. Failing the sole purpose test
The fund must be maintained only to provide retirement benefits, or death benefits if a member dies before retirement. Under the trustee obligations, nobody can get a present-day benefit from fund assets. A relative using a fund-owned holiday home is the classic case. Read how bare trusts hold SMSF property if the fund owns real estate.
2. Loans to members or relatives
The ATO investment restrictions are blunt: an SMSF cannot provide loans or direct or indirect financial assistance to a member or relative, or guarantee their loans. The size of the loan does not matter.
3. In-house assets over 5%
An in-house asset is a loan to, an investment in or a lease to a related party. These cannot exceed 5% of the market value of the fund’s total assets. If they do at 30 June, the trustees must prepare a written plan before the end of the next financial year and carry it out. Business real property leased to a related party is an exception.
4. Non-arm’s length dealings
Below-market rent from a related tenant, or an asset bought from a related party at the wrong price, can turn income into non-arm’s length income, taxed at 45% under the ATO tax rules. Related-party purchases are generally limited to listed securities, business real property and a few other categories at market value.
5. Missing the minimum pension
A fund paying a pension must pay at least the minimum amount each year: 4% of the balance under age 65, 5% from 65 to 74, rising to 14% at 95 or more.
6. A weak investment strategy
Templates with 0 to 100% ranges, no insurance decision and no review evidence are common auditor findings. See our SMSF investment strategy guide.
7. Mixing fund and personal assets
The ATO’s setup rules require fund assets to be kept separate from the personal assets of trustees and directors, held in the fund’s name or by the trustees as trustees for the fund. The bank account must belong to the fund alone. Paying a personal bill from the fund account, or holding shares in a member’s own name, creates an ownership problem the auditor has to report.
8. Missing paperwork
Trustees must keep minutes of decisions, sign the trustee declaration within 21 days of appointment and keep it while they remain a trustee or for 10 years, whichever is longer. Written consents to act as trustee are kept for the life of the fund and 10 years after it winds up. Missing records carry their own penalties, shown in the table above.
What can the ATO do as SMSF regulator?
- Rectification direction: fix the breach by a set date and prove it.
- Education direction: complete an approved course, then re-sign the trustee declaration within 21 days.
- Enforceable undertaking: a written promise to fix the breach.
- Administrative penalties: as in the table above, paid personally.
- Disqualification: the person can no longer act as a trustee or director of a corporate trustee.
- Notice of non-compliance: fund income taxed at 45%.
- Civil and criminal penalties through the courts, and freezing fund assets.
What are the key annual deadlines?
| Task | Deadline |
|---|---|
| Appoint auditor | No later than 45 days before the return is due |
| Give auditor information they request | Within 14 days of the request |
| Return: new fund or overdue self-lodger | 31 October, pay by 1 December |
| Return: other self-lodgers | 28 February |
| Notify ATO of trustee or director change | Within 28 days |
| In-house asset plan if over 5% at 30 June | Before the end of the next financial year |
Worked example: an in-house asset breach
At 30 June 2026 an SMSF has total assets with a market value of $900,000, including a $60,000 loan to a company the members control.
In-house asset ratio: $60,000 / $900,000 = 6.67%, which is above 5%.
Maximum allowed: $900,000 x 5% = $45,000. Excess: $60,000 – $45,000 = $15,000.
The trustees must prepare a written plan before 30 June 2027 to bring the ratio to 5% or below, and carry it out. The auditor will look for the plan and evidence it was implemented.
If an administrative penalty under s84(1) is applied to a contravention after 1 July 2026, it is 60 x $364 = $21,840, payable personally, not from the fund.
Rule of thumb: if a transaction involves a member, a relative or a related company, stop and check the investment restrictions before money moves. Most expensive SMSF breaches start that way.
Common mistakes trustees make after a breach
- Paying the penalty from the fund: the ATO says penalties cannot be paid or reimbursed from fund assets.
- Waiting for the auditor: fix contraventions as soon as you find them.
- Lodging late to hide a problem: it adds a late return to the breach.
- Undocumented fixes: keep minutes, valuations and new agreements as evidence.
- Using an auditor who is not independent: the ATO says the auditor should not have close personal or business ties with trustees.
FAQ about SMSF compliance and ATO audits
When must I appoint my SMSF auditor?
Each year, no later than 45 days before the annual return is due. The auditor must be an approved SMSF auditor registered with ASIC, and you put their SMSF auditor number on the return. You must give them a statement of financial position and an operating statement, and answer any further request within 14 days.
When is the SMSF annual return due?
For self-lodgers, newly registered funds and funds with overdue returns must lodge by 31 October. Other returns are due 28 February unless the ATO sets a different date. If a tax agent lodges, the agent’s lodgment program applies, although a first-year fund reviewed at registration still has a 31 October due date.
Can my SMSF lend money to me or my family?
No. The ATO says an SMSF cannot provide loans or any direct or indirect financial assistance to a member or a member’s relative, and cannot guarantee their loans. Lending to members and relatives carries an administrative penalty of 60 penalty units, which is $21,840 at the $364 rate that applies from 1 July 2026.
Who pays SMSF administrative penalties?
The trustees, personally. The ATO says the penalties cannot be paid or reimbursed from the fund’s assets. Penalties are imposed on individual trustees, or on the directors of a corporate trustee, who share joint and several liability. Each penalty is a set number of penalty units, valued at $364 each for contraventions from 1 July 2026.
What happens if the auditor reports a breach?
If an auditor lodges a contravention report and the breach has not been fixed, the ATO will write to the trustees, usually asking them to rectify it. Depending on how serious it is, the ATO can then issue a rectification or education direction, apply administrative penalties, accept an enforceable undertaking, disqualify a trustee or make the fund non-complying.
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Nanak Accountants can review your fund before the audit, prepare the SMSF accounts and annual return, and help with rectification plans. See our SMSF services, call 1300 626 258 or visit nanakaccountants.com.au. Official guidance is on the ATO website.
This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO SMSF non-compliance, auditor, annual return, investment restriction, pension and penalty unit pages on 9 October 2026. Rates and thresholds change, so confirm the current position before acting.
