IN THE last week of August another recommendation of the Cooper review of superannuation was adopted by the Gillard government. It took the form of draft legislation providing the Commissioner of Taxation with greater administrative and penalty powers to regulate self-managed superannuation funds.
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.
Frequently Asked Questions about this Article…
What new powers will the Commissioner of Taxation have over SMSFs under the draft legislation?
The draft law gives the Commissioner of Taxation broader administrative powers over self‑managed super funds (SMSFs). The commissioner will be able to impose administrative penalties without going to court, require trustees to take specific corrective actions (rectification directions), and direct trustees to undertake education courses. Penalties will be imposed on individual trustees or directors rather than on the fund itself, and legislation says those penalties cannot be reimbursed by the SMSF.
How does the non‑complying SMSF tax penalty work now?
Under the current regime, when an SMSF is made non‑complying for tax purposes a penalty tax takes 46.5% of the fund’s assets. That remains the most severe sanction available today compared with the new administrative penalty options proposed in the draft legislation.
What size of fines will apply under the new administrative penalty regime for SMSF breaches?
The draft legislation specifies fines on a penalty‑unit basis ranging from 5 to 60 penalty units. With each penalty unit valued at $110, fines would range from $550 up to $6,600, depending on the breach. Administrative penalties will only apply to 17 specific breaches listed in the legislation.
Which SMSF breaches attract the highest fines under the proposed rules?
There are three breaches that attract the higher end of the penalty scale: the ban on super funds lending to members, breaches of the restrictions on borrowing other than under limited recourse borrowing arrangements (LRBAs), and breaches of the in‑house asset rules.
What is a rectification direction and what must trustees do if they receive one?
A rectification direction specifies the actions trustees must take to fix a breach of the superannuation rules. The direction will include a time limit for completing the rectification and trustees will be required to provide evidence that the required actions have been taken.
What are education directions for SMSF trustees and who pays for the courses?
If trustees demonstrate they do not have a proper understanding of superannuation and SMSF rules, the commissioner can direct them to undertake an approved education course within a specified timeframe. After completing the course, trustees must confirm their understanding by signing (or re‑signing) the SMSF trustee declaration form. The draft legislation also bans SMSFs from reimbursing trustees for the cost of undertaking education courses. The draft is unclear on who will provide the courses, although it states courses may be approved by the commissioner and that fees cannot be charged for an approved course.
Will trustees be personally liable for fines under the new regime?
Yes. Under the proposed rules administrative fines will be imposed on individual trustees or the directors of trustee companies, rather than on the SMSF itself. The legislation also specifies that these penalties cannot be reimbursed by the SMSF.
When are the new SMSF administrative penalty powers scheduled to start?
The draft legislation is scheduled to apply from next July 1. (The article describes the commencement as ‘scheduled to apply from next July 1’.)
Call 1300 880 160
Start a chat
Schedule a call
