- Current penalty regime for SMSFs has only harsh penalties for breaches
- New regime allows ATO to impose monetary penalties or issue orders to trustees
- Structure of financial penalties benefits corporate trustees
The current penalty regime for superannuation funds, including SMSFs, is brutal and complicated. The Tax Office can make a fund non-complying (resulting in a massive tax bill), apply to the court for financial penalties to be imposed on a trustee, disqualify a trustee or accept an enforceable undertaking from them.
For many breaches, these penalties (and the processes to be followed) are out of proportion with the crime committed. So either the trustee gets whacked with an excessive penalty, or doesn’t get penalised at all.
Come 1 July 2014, this situation will change. New rules,colloquially known as the ‘speeding ticket legislation’, will commence and give the Tax Office other options when it comes to penalising SMSF trustees. The speeding ticket rules give the Tax Office three additional penalty options: rectification directions, education directions and administrative penalties.
A rectification direction is issued to a trustee (or director of a corporate trustee) and requires them to take action to fix up a contravention of the superannuation rules (the SIS Act or related regulations). For example, if a fund has borrowed money, the Tax Office might issue a rectification direction requiring it to be repaid.
Before issuing a rectification direction, the Tax Office is required to consider the scale of any financial detriment that might be suffered and the seriousness of the breach (including past compliance history). The idea here is to make the punishment fit the crime.
An education direction requires a trustee (or director) to undertake an approved course, provided by the Tax Office or other educational bodies. The courses are to be provided free of tuition fees.
Once completed, the person must provide the Tax Office with a signed declaration that they understand their duties as trustee of a SMSF.
In addition to the rectification and education directions, the Tax Office will have the power to impose an administrative penalty on trustees (or directors) who breach one of seventeen listed SIS Act rules (see Table 1).
|Provision of SIS Act?||Rule breached||
|s34||Contravene a prescribed standard. For example the requirement to formulate, review regularly and give effect to an investment strategy (including consideration of insurance)||3,400|
|s35B||Failure to prepare financial statements||1,700|
|s65||Lending or providing financial assistance to members or their relatives||10,200|
|s67||Super fund borrowings outside the exemptions (eg limited recourse arrangements)||10,200|
|s84||Trustees not taking reasonable steps to comply with in-house asset restrictions||10,200|
|s103**||Failing to keep trustee elections and minutes for at least 10 years||1,700|
|s104||Failing to keep records of change of trustees for at least 10 years||1,700|
|s104A||Failing to sign trustee declaration within 21 days of appointment and keeping for at least 10 years||1,700|
|s105||Failing to keep member reports for at least 10 years||1,700|
|s106||Failing to notify Tax Office of an event that has significant adverse effect on the super fund's financial position.||10,200|
|s106A||Failing to nofity Tax Office of change of status of SMSF (eg super fund ceasing to be a SMSF)||3,400|
|s124||Failing to appoint investment managers in writing||850|
|s160||Failing to comply with Tax Office education directive||850|
|s254||Failing to provide the Regulator with information on the approved form within the prescribed time upon establishment of the super fund||850|
|s347A||Failing to complete a form with requested information provided by the Regulator as part of the Regulator’s Statistical Program||850|
*Penalties are defined as a fixed number of units, with each unit being worth $170. So the penalty which applies to, for instance, 'failure to prepare financial statements' is 10 units.
** Technically, this is three separate breaches grouped together.
Where the breach is of an obligation that applies to trustees generally (for instance, the requirement to prepare accounts) each trustee will be subject to the penalty. So, if a fund has four individual trustees, they’ll be required to pay a combined total of $6,800 for failure to prepare accounts. A corporate trustee only counts as a single trustee no matter how many directors or fund members.
Directors (at the time) are jointly and severally liable for penalties imposed on a corporate trustee. So if you become a director of a trustee company you can become liable for prior breaches.
Who bears the cost?
Trustees, or directors, can’t be reimbursed by the SMSF for any education costs or administrative penalties they incur. However, there is no prohibition on the SMSF bearing the costs of a rectification direction.
However, if the trustees have breached their duties or failed to exercise reasonable care, they may not be permitted under trust law or the fund’s trust deed to seek reimbursement.
Rights of review
Trustees have the right to request that the Tax Office vary a rectification or education direction. The request must be made before the specified date for completion of the direction and the Tax Office has 28 days to consider the request.
If a trustee or director seeks cancellation of the direction, they need to take the matter to the Administrative Appeals Tribunal (AAT).
One point to keep in mind is the difference in the potential penalties applying to corporate and individual trustees (if there are more than one). In the example above, a total penalty of $6,800 could apply where a fund had four individual trustees. However, a corporate trustee with four directors would only be liable to a penalty of $1,700.
This is another point to add to the list of reasons why you’re better off with a corporate trustee (see Why your SMSF needs a corporate trustee).
Remember also that the new ‘speeding ticket regime’ adds to the penalty options available to the Tax Office. It doesn’t replace the old, harsh penalties – the Tax Office remains free to impose them on wayward trustees – and it probably means the Tax Office is less likely to overlook contraventions.
Finally, whilst it will hopefully never affect you, harsher penalties (including up to five years imprisonment) have also been introduced for those promoting schemes providing early access to super accounts.
The new light touch penalty regime isn’t an excuse to start making mistakes, but may help to match the punishment with the crime. Whilst it means you’re less likely to suffer a brutal penalty for a minor mistake, it also makes it less likely breaches will go unpunished, making it as important as ever that your SMSF’s house is in order.