Illegal Early Access Payments

On occasion, SMSF members illegally access preserved benefits. Even though this constitutes a breach, if the amount is repaid quickly, and with interest, and it’s the first time it’s happened there will generally be no consequence. If inaction and the passage of time demands it be processed as a benefit payment then it will be included in the member’s assessable income and taxed as ordinary income. The ATO can exercise a discretion to allow concessional tax treatment, but this is unlikely for an SMSF member payment due to the level of control the member/trustee has over the fund’s transactions. A bank error could provide reasonable cause though the trustees would be expected to have noticed it in a reasonable time frame.

Notably the ATO’s practice note states the following factors will have little or no weight when deciding whether to exercise the discretion:

  • the individual is suffering financial hardship or distress at the time they received the benefit,
  • the member has attempted rectification by repaying the amount as a contribution.

Though extra taxation is a deterrent it would not be widely effective unless other consequences, such as disqualification of the individual from being a trustee/director and administration penalties, were not also applicable.

The bottom line – don’t do it!