SMSF trustees can be subject to a suite of penalties, if they fail to properly adhere to the super rules.
The explanatory memorandum that accompanied the relatively new legislation, states that the SMSF penalties, which took effect from 1 July 2014 will enable the ATO to “give directions and impose administrative penalties for contraventions of the SIS Act [and] will provide the Regulator with additional tools, both educational and punitive, in conjunction with… existing powers.”
One of the most significant changes to be made is that since 1 July 2014, if the ATO imposes financial penalties on you as SMSF trustee, you cannot pay your fine from SMSF assets. You must pay the fine from your personal assets. For example, if a new SMSF trustee fails to sign the SMSF trustee declaration within 21 days of becoming a trustee, then he or she could be fined 10 penalty units, which translates into $2,100!
Note: For a breach that occurred in the timeframe from 1 July 2014 until 30 July 2015, a penalty unit is worth $170, which means the fine translates into $1,700. If the breach occurs on or after 31 July 2015 and before July 2017, then a penalty unit is worth $180, and the fine for failing to sign the SMSF trustee declaration would be $1,800. From 1 July 2017 onwards, the value of penalty unit increased to $210, which means, for example, failing to sign the SMSF trustee declaration within 21 days of becoming a trustee can mean a fine of $2,100.
You can read more detail about penalties, and the size of the financial penalties, later in the article.
Financial penalties may be a softer option
Although the size of some of the financial penalties that are now possible may surprise you, these penalties are a better option than losing half of your SMSF assets via penalty tax, which until 30 June 2014 was about the only ‘big stick’ financial option available to the ATO. Note the regulator also can currently disqualify you as an SMSF trustee, and force you to fix a breach, and even take you to court to impose civil or criminal penalties. The ATO can continue to impose these more severe penalties but is now more likely to impose financial penalties when trustees breach the super laws.
Until 30 June 2014, the options for the ATO to punish misbehaving SMSF trustees were costly and time-consuming and the consequences for the SMSF trustee involved are often more serious than the breach the SMSF trustee is being punished for. As a result, the ATO has rarely imposed the more onerous penalties on misbehaving SMSF trustees.
Since 1 July 2014, the new ATO powers to give directions and impose administrative penalties means that the ATO can punish SMSF trustees without the prospect of the trustees losing half of their retirement savings in penalties. You may even be ordered to go back to school, at your own cost!
A quick summary of the administrative penalty regime is set out later in the article.
Get serious about SMSF compliance
As a SMSF trustee, you will need to ensure that your super fund complies with the super rules, and that you have systems in place to monitor whether your SMSF is meeting reporting deadlines, administration requirements and other super rules.
As a SMSF trustee, some of the compliance issues that you need to consider (and this list is merely an illustration rather than a comprehensive list), include the following:
- Introduction of July 2017 super changes. Significant changes which took effect from 1 July 2017, include a $1.6 million cap on super transferred to retirement phase, lower contributions caps, possibility for employees to make tax-deductible super contributions, and the removal of the tax exemption on earnings financing a transition-to-retirement pension (see SuperGuide article Latest superannuation changes: 2017/2018 guide).
- Introduction of SuperStream: Since 1 July 2014, employers with 20 or more employees have been required to use the SuperStream standard, and all super funds, including SMSFs, must receive super contributions from these employers in accordance with the SuperStream standard. Note that the official date of 1 July 2014 was moved back to 3 November 2014 for employers, and the ATO has allowed this segment of employers until 30 June 2015 to implement the processes. Although smaller employers had some flexibility in implementation timeframes (until 30 June 2016), SMSFs were supposed to be ready to accept these super contributions from 3 November 2014. For more information, see SuperGuide article SMSF contributions: Your employer and fund must use SuperStream
- SMSF supervisory levy. Another increase in the SMSF supervisory levy paid to the ATO, taking the levy to $259, which started from the 2012/2013 year. You also must pay the levy earlier than in previous years. For more information see SuperGuide article SMSFs: ATO supervisory levy must be paid in advance.
- SMSF auditors must be registered. Since 1 July 2013, SMSF trustees must confirm that the SMSF auditor appointed to audit the SMSF is registered with ASIC as an approved SMSF auditor. SMSF trustees can confirm registration status by ensuring the auditor has a SMSF auditor number (SAN), and checking the ASIC register using ASIC’s online service ASIC Connect. The SAN must have been included in SMSF annual returns since 1 July 2013. Note that SMSF auditors must have been registered with ASIC by 30 June 2013, to be able to conduct SMSF audits from 1 July 2013. At the very least, any prospective SMSF auditors must have applied to ASIC by 30 June 2013, to be eligible for any transitional arrangements. Note that transitional arrangements have now ended. For more information on approved SMSF auditors see SuperGuide article, SMSF audit: You must appoint an approved SMSF auditor.
- Related party transactions. Off-market share transfers are here to stay for SMSFs. The proposed change was, that from 1 July 2013, purchases and disposals of assets between related parties of a SMSF would have needed to be conducted via an underlying market for that asset type, and if an underlying market did not exist, then the transaction must be supported by an independent valuation. This proposed change did not eventuate. For background information on this rule see SuperGuide article SMSFs: Green light for off-market share transfers.
- Review investment strategy You must review your super fund’s investment strategy regularly to ensure that it still meets the needs and objectives of your fund members. According to the ATO, proof of a review may involve documenting any review decisions in the minutes of trustee meetings held during the year.
- Consider the merits of life insurance. You must consider the merits of life insurance for each SMSF member, although taking out life insurance is optional. For more information on life insurance and super, see SuperGuide article SMSFs must consider life insurance needs.
- Value your SMSF assets at market value. You must value the SMSF’s assets at market value when preparing financial accounts and statements from the 2012/2013 year onwards. The ATO has produced valuation guidelines for SMSF trustees and their advisers. Click on this link to access the guidelines.
- Keep personal assets separate from SMSF assets or get fined. You have always been required to keep your personal assets separate from your SMSF’s assets, but now this requirement is an operating standard. This change to the legal status of this requirement means that you can now be hit with a fine of many thousands of dollars if you break this rule.
- Since 1 July 2011, investment in new collectibles have been subject to stricter rules, in particular storage and insurance. Existing collectibles must have complied with new rules by 1 July 2016. For more information see SuperGuide article SMSF compliance: Strict rules for artwork and other collectibles.
- SMSF borrowing. Limited options are available for SMSF trustees to use gearing when investing. For more information, see SuperGuide article SMSF basics: Can my DIY super fund borrow money? .
Administrative penalties: A quick summary
A quick summary of the administrative penalty regime is set out below:
- New administrative penalties. Since 1 July 2014, the ATO has had the power to impose a new list of administrative penalties. Penalties range from 5 penalty units up to 60 penalty units. From 1 July 2014 until 30 July 2015, each penalty unit equates to $170. For example, if a SMSF trustee failed to sign a SMSF trustee declaration, he or she could be fined 10 penalty units, that is $1,700. From 31 July 2015 until 30 June 2017, each penalty unit equates to $180. For example, if the trustees of a 2-member fund failed to prepare financial statements for the fund for the 2015/2016 year, this means the 2 trustees can be fined $1,800 each. Since 1 July 2017, the maximum administrative penalty for a single breach is $12,600 (60 x $210), and such a fine would apply where, for example, a SMSF trustee breached the borrowing rules, or the in-house asset rules. The full list of penalties are set out in Schedule 2 of the Tax and Superannuation Laws Amendment (2014 Measures No 1) Act. For more information on these penalties, and the increase in the penalty unit to $219, see SuperGuide article SMSF trustees now face bigger penalties (from 2017/2018 year).
- Power to force rectification. The ATO will have the power to force you to rectify specific contraventions. According to the explanatory memorandum accompanying the legislation, the ATO can give a ‘rectification direction’ to an SMSF trustee that “will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the Regulator with evidence of the person’s compliance with direction.”
- Mandatory trustee education. If you’re a naughty SMSF trustee in the eyes of the ATO, you can be forced to attend mandatory trustee education, when the ATO gives you an ‘education direction’. The ATO can give an ‘education direction’ that “will require a person to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course.” You will also be required to sign, or re-sign the SMSF trustee declaration to confirm that you understand your obligations and duties as a trustee.
- Approved courses. If you are issued with an SMSF trustee education direction, you must attend a course that the ATO deems to be ‘approved courses’ for the purposes of the education direction.
Criminal and civil sanctions for early access promoters. Since April 2014, the ATO can impose criminal and civil sanctions on promoters of illegal early access super schemes.
NOTE: Taxation of illegal access of super money not going ahead. Amounts illegally accessed from a SMSF were to be taxed at the superannuation non-complying tax rate (49%, and from July 2017, 47%).This measure was originally intended to take effect from 1 July 2013, but the Liberal government is not proceeding with this measure.
For more information about the ATO’s administrative penalty regime, see SuperGuide article SMSF trustees now face bigger penalties (from 2017/2018 year).