New shots in the locker, tax chief lays sights on SMSFs

Under his present powers the commissioner has very few weapons with which to deal with breaches by trustees of superannuation and SMSF regulations. Apart from applying to a court for civil penalties to be imposed, and requiring trustees to accept an enforceable undertaking in relation to contraventions, the only other weapon available to the commissioner is to make an SMSF non-complying for taxation purposes.

When a fund is made non-complying, 46.5 per cent of its assets are taken as a penalty tax. This means under the current regime the commissioner can impose penalties that range in severity between applying to the court to impose the equivalent of an on-the-spot fine, and being the judge, jury and executioner by imposing what is effectively a death penalty for an SMSF.

The new law, scheduled to apply from next July 1 will give the commissioner the power to:

Impose administrative penalties without reference to a court.

Require trustees to take specific action to correct breaches.

Require trustees to undertake education activities.

Under the new penalty regime fines will be the imposed on either the individual trustees or the directors of the trustee company rather than the fund itself. In addition, the legislation specifies that penalties imposed on individuals or directors cannot be reimbursed by the SMSF.

Administrative penalties will not be imposed for all breaches of the superannuation regulations, but will only apply to 17 breaches specified by the new legislation. Fines are applied on a penalty unit basis that range from five penalty units up to 60. Each penalty unit has a value of $110, meaning fines will range from $550 to $6600.

There are only three breaches where the higher fine will be imposed. They relate to the ban on super funds lending to members, the restriction on a fund borrowing money other than under the limited recourse borrowing arrangements, and for breaches of the in-house asset rules. The smaller fines are imposed for more administrative breaches such as for failing to sign required documentation.

If history is any guide, the fines will only be imposed when trustees of an SMSF do not comply either with a rectification direction or an education direction given by the commissioner.

Rectification directions will specify actions that must be taken by the trustees of an SMSF to fix a breach of the regulations. A time limit will be placed on when the rectification must be completed and trustees will be required to provide evidence of the actions having been taken.

Where trustees demonstrate that they do not have a proper understanding of the superannuation and SMSF regulations they will be directed to undertake a course of education within a specified time frame.

After the completion of the education, trustees will need to confirm that they understand their obligations and duties by signing or re-signing the SMSF trustee declaration form. SMSFs will be banned from reimbursing trustees for the cost of undertaking education courses.

The draft legislation does not make clear who will provide the courses. This lack of clarity with regard to courses is made worse by the draft legislation specifying that education courses may be approved by the commissioner, but fees cannot be charged for an approved course.