ATO upgrades its DIY super weaponry

The Australian Tax Office is about to get a whole lot tougher on self-managed super funds, with its available weapons arsenal to punish wayward trustees set to be expanded from mid-year. And its broader weaponry makes more sense too.

Dare I say it, the new penalties are actually good news for self-managed super fund trustees.

While the concept surrounding the new rules was announced nearly a year ago, the draft legislation – which is an update to the Superannuation Industry Supervision (SIS) Act – has only just been released.

From July 1, the ATO will be able to impose financial penalties for more offences. And it also will to be able to send you off to be “re-educated”. (No, it doesn’t appear to be Iron Curtain/gulag stuff, but real courses to help SMSF trustees understand their roles and responsibilities.)

The penalties available to the ATO commissioner have been considered to be too limited. The aim of the new enforcement rules, while an expansion of the current penalty regime, is to introduce more of a carrot and stick approach for the ATO by allowing it to use smaller, targeted penalties.

The three, new, broad powers are that the ATO will be able to issue “rectification directions”, “education directions”, and broader “administrative penalties” that penalise the trustees themselves, rather than the fund.

Education directions

The number of SMSFs has been growing exponentially for a long time. Some people make that decision to open a SMSF themselves, while others open their SMSFs after following the advice of financial advisers and/or accountants.

But the level of knowledge of those taking on their role of trustees has always been a concern to the ATO. They are often starting with less-than-optimal knowledge. A significant concern is that few then go on to actually learn much at all – and worse, don’t have professional SMSF advisers helping them with their decisions.

The ATO will be able to send trustees on the naughty list off for re-education – expect an explosion of new ATO-approved courses – to help with the education process. I’ve previously looked at the suggestion that SMSF trustees could be required to do a course before they are allowed to open a SMSF, which has thankfully never been considered particularly seriously.

I don’t have detail on what those courses are yet, or how long they’ll be, or how much they’re going to cost.

However, they can be used when the ATO has developed a clear sense that trustees don’t actually understand what they’re doing and have made mistakes as a result.

If the trustees don’t complete the course, they can cop a fine of $1,700 and an administrative penalty of $850. Once they’ve done that course, they will need to re-sign a trustee declaration form to say that they understand their duties, which SMSF trustees have had to sign in recent years before opening their fund. Failure to do so could lead to another fine of $1,000.

The legislation specifically says that any fines arising from these new enforcement rules must be paid for by the individuals and cannot be reclaimed as an expense from the SMSF. Ditto with any travel or actual course expenses incurred.

Rectification directions

The ATO will also be able to make specific directions on how to fix a problem. I’m incredulous that they haven’t always had these powers.

The “rectification directions” can spell out the exact nature of what needs to be done and nail it to a timeframe. The costs of complying with the work must be borne by the trustee, not the SMSF.

And failure to meet requests comes at a price of $1,700 per breach. I would think it unlikely that rectification requests will rarely be one breach. There could, potentially, be dozens of requests each time the ATO investigates your fund and finds you worthy of a breach notice.

Administrative penalties

One penalty unit will be worth $170. And getting something wrong that is considered to be an “administrative breach”, will cost you between five and 60 units. That’s $850 to $10,200.

Failing on the “prohibition of loans to related parties”, or disposing of assets to a related party, will cost you $10,200. Not having accounts acceptably up-to-date will set you back $1,700. Breaking the prohibition against borrowing is $10,200.

Failing to notify of a significant adverse event is $10,200 and breaching the “in-house assets test rule” is the same amount.

You can also be fined $1,700 for not recording the proper changes for trustees, or failing to failing to sign the “trustee declaration requirements”.

As you would expect, there’s a comprehensive list, which I can’t detail here.

However, the ATO has the ability to levy these penalties per trustee (whether individual or directors of the corporate). So, you can potentially multiply these penalties by up to four. And, remember, they must be paid for by the trustee as an individual, not from the SMSF’s assets.

Why the new penalties are good for SMSF trustees

Many in the industry have argued that the ATO simply hasn’t had enough breadth to be able to distinguish between trustees who have mistakenly erred ... and those trustees who simply don’t care about the rules.

These fines give the ATO much broader discretion – even if some of the rulings say the ATO does not have discretion on penalties for some matters – and should allow the ATO to provide more consistent warnings across the industry.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au
 

• Direct investment options are unlikely to keep members looking to start their own self-managed super funds (SMSFs) from leaving, according to research from CoreData. “Members are more interested in lower fees, competitive returns, customer service and advice offers more so than direct options,” CoreData head of advice, Salvador Saiz reportedly said. CoreData also found that SMSFs are still the most popular option among post-retirees, with more than 27% saying SMSFs as offered the best retirement solution. CoreData also found 14.4% of SMSF trustees believe they will move their investments back into the mainstream super system once running an SMSF becomes too much of a burden in later life.
• Superannuation contributions to Australian Prudential Regulation Authority (APRA) funds grew 10.15% to $21.6 billion in the December quarter, reflecting continued growth in equity markets. Meanwhile, discretionary contributions for the quarter saw positive growth for the first time since September 2011. “The rebound in discretionary contributions in the December quarter after a year of decline is a welcome sign of improved confidence in superannuation,” Mr Bond said.
• IOOF and Zurich Australia Ltd have launched a new product aimed at self-managed superannuation fund (SMSF) trustees. The product, IOOF SMSF Insurance, is described as an “easy to use, cost-effective insurance solution for SMSF clients”. “There is an industry-wide issue of under-insurance in SMSFs and we believe our solution plays an important role in addressing this challenge,” IOOF general manager Renato Mota said.