The Australian Taxation Office - as regulator of Australia's 407,000 self-managed super funds - has sent a stinging message to fund trustees: get your fund in order or possibly face one of the toughest actions that it can apply.

The ATO has a rarely-used power to declare that a SMSF is non-compliant. In short, the tax cost to such a fund is staggeringly high.

As the tax office succinctly explains: "Once a fund is found to be non-compliant, it loses access to concessional tax treatment and its taxable income is assessed at the top marginal rate."

And now for the heaviest slug: "In the year a previously complying fund becomes non-complying, its income includes the assets of the fund less any undeducted [after-tax or concessional contributions], thereby recouping all previously allowed tax concessions."

This means, for instance, that the assets of a fund that has relied solely on superannuation guarantee and salary-sacrificed contributions could forfeit almost half of its assets!

Within the tax office, the declaration of a fund as non-compliant is generally viewed as almost a last-resort measure.

As reported by Super News Alert, published by Thomson Reuters, the Administration Appeals Tribunal late last week upheld a decision by the ATO to issue a notice of non-compliance to an SMSF. The fund's trustees had contravened the in-house asset rule in superannuation law and had taken years to rectify the position.

Under the in-house rule, a SMSF must not invest, lend or lease to related parties (including members) of the fund more than 5% of its assets.

Astute trustees will no doubt view the case as yet another reminder - albeit unusual in that the fund has been declared non-compliant - of the need to diligently comply with superannuation law.

The investment markets can be tough enough at times but the ATO can, in certain circumstances, perhaps extract a higher price than even falling stock prices.

The SMSF involved in the case made loans to a related company to support its business activities. The loans were much higher than permitted under the in-house asset rule.

"The company failed to repay the loan until four years later, which was two years after the fund's auditors had reported the breach to the [fund] trustees and to the ATO,"says the tax office.

This fund has potentially lost close to half of its total - depending upon the nature of its contributions - by being declared non-compliant. What a sad but crucial lesson this should send to all fund trustees.