Tax compliance behaviour in Australian self-managed superannuation funds

Abstract

The rapid growth of self-managed superannuation funds (SMSFs) in Australia over the past two decades has been mirrored by a host of legislative and taxation rulings regulating the sector. The need for trustees to remain compliant with the relevant regulations is of paramount importance given the severity of the penalties they face for contraventions. We review the main rules governing SMSF compliance along with several notable legal cases of non-compliance. We then provide a comprehensive quantitative analysis of compliance outcomes in 321 SMSFs from across Australia. This research paper focusses only on SMSF trustee behaviour in respect of funds where the auditor has reported a breach. It does not refer to SMSF funds that are technically non-compliant as that term is defined in s 42A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Therefore, in terms of this paper, whenever a SMSF is referred to as non-complying regard is only had to a SMSF where an auditor has reported a breach of any of the regulatory rules. The results of our research suggest that trustee literacy is positively associated with fund compliance, whereas trustee overconfidence cannot be linked with compliance outcomes for the sample. Moreover, compliant funds also appear more likely to allocate a greater share of their superannuation portfolios to conservative asset classes (cash and domestic equities), typically linked with under-diversification in SMSFs. Our findings therefore suggest that the financial risks borne by under-diversified SMSFs may at least in part be offset by a lower compliance burden for these funds.