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It’s a rare person who enjoys paperwork. But for trustees of a self-managed super fund (SMSF), it’s a necessary evil.
That’s because there can be serious penalties if your fund isn’t set up and managed to comply with superannuation and taxation legislation. These penalties are imposed by the SMSF sector regulator, the Australian Taxation Office (ATO).
Non-compliance penalties are there to ensure trustees manage their fund for the sole purpose of providing retirement income and to deter them from illegally taking advantage of generous tax concessions available under Australian superannuation law.
An overview of SMSF penalties
While the ATO prefers to take a ‘prevention before correction’ approach to SMSF compliance, more serious or continued breaches attract more severe penalties. Penalties that can be imposed by the ATO for SMSF non-compliance include:
- Enforceable undertakings
- Rectification directions
- Administrative penalties
- Raising income tax assessments
- The freezing of the fund’s assets
- Trustee disqualifications
- The winding up of the fund
- Civil and criminal penalties.
Let’s look at each of these in detail.
SMSF trustees can potentially rectify non-compliance via an enforceable undertaking. This is a written commitment by trustees to:
- Stop the non-compliant behaviour
- Take action to rectify the fund’s non-compliance within a designated timeframe
- Explain how and when they will report that their fund’s non-compliance has been rectified
- Implement strategies to prevent the non-compliant behaviour from happening again.
It’s up to the ATO to decide whether to accept the enforceable undertaking of trustees. Factors that the ATO considers include:
- The trustee’s compliance history
- The extent of the non-compliance (e.g. whether there are criminal consequences)
- Whether the non-compliance can be satisfactorily rectified, as well as when and how it will be done.
The ATO can provide a specific written direction to SMSF trustees explaining action they need to take to rectify their non-compliance. This action must be taken within the timeframe specified by the ATO, and trustees must provide evidence once it’s been done.
Trustees who fail to comply with rectification directions may be disqualified and their fund exposed to significant tax penalties.
Individual trustees and corporate trustee directors are subject to financial penalties if they contravene any of the provisions of the Superannuation Industry (Supervision) Act 1993. Different types of breaches carry different penalties. The ATO provides a list of provisions of the Act and their associated penalties.
Penalties are assigned penalty units ranging from five to 60. Currently, each penalty unit incurs a fine of $275. So, a breach of five penalty units would mean a penalty of $1,375 and breach of 60 units $16,500.
|Date when infringement occurred
|Penalty unit amount
|Up to 27 December 2012
|28 December 2012 to 30 July 2015
|31 July 2015 to 30 June 2017
|1 July 2017 to 30 June 2020
|1 July 2020 to 31 December 2022
|On or after 1 January 2023
Financial penalties must be paid from personal savings, not from the fund.
It’s also important to note that financial penalties for the same offence are more severe for SMSFs with an individual trustee structure and more than one member/trustee than those run by a corporate trustee. This is because the penalty is applied to each trustee individually, whereas under a corporate trustee structure, a single penalty is applied to the company involved. The directors of the company share the penalty.
This is best illustrated with an example. Let’s consider two SMSFs. The first has four members who are also the fund’s individual trustees. The second is set up with a corporate trustee and each of the four fund members are directors of the corporate trustee.
Now let’s assume that each SMSF fails to prepare its financial accounts and statements. This form of non-compliance attracts ten penalty units for a fine of $2,750. This fine will be applied to each of the individual trustees of the first super fund, so the breach effectively attracts a total fine of $11,000.
However, the $2,750 fine will be applied to the second fund’s corporate trustee as a single entity, to be shared among the four directors. They will each be liable for just $687.50.
Raising income tax assessments
If a member has illegally accessed their super without meeting a condition of release, the accessed amount will be included in their assessable income, even if they repay it to the fund later. This means the member may have to pay:
- Additional income tax at the top marginal rate of 45% instead of the concessional super rate of 15%
- Tax shortfall penalties
This is in addition to any administrative penalties and potential disqualification.
Freezing the fund’s assets
Trustees (or investment managers) may be given a notice to freeze the assets of their SMSF if the ATO believes their conduct is adversely affecting the performance or compliance of the fund.
This effectively means the trustees can’t buy, sell or deal with the fund’s assets while the ATO deems them frozen.
The ATO has the option to disqualify individuals from acting as individual or corporate SMSF trustees if they have been non-compliant. The ATO considers the seriousness of the non-compliance in deciding whether to impose this penalty.
It’s an offence to continue as an SMSF trustee if you’ve been disqualified.
Winding up the fund
The ATO can also allow a non-compliant SMSF fund to be wound up, with a rollover of its funds into a public super fund regulated by the Australian Prudential Regulation Authority (APRA).
However, depending on the type of contravention, the ATO may still issue the SMSF with a notice of non-compliance or apply penalties.
Civil and criminal penalties
Serious breaches of super legislation can result in the ATO applying for civil or criminal penalties to be imposed on SMSF trustees.
Examples of serious breaches include:
- The SMSF not satisfying the sole purpose test. The ATO requires super funds to be maintained for the sole purpose of providing retirement benefits to their members (or to their dependants if a member dies before retiring)
- The SMSF lending its funds to its members/trustees
- The SMSF allowing its members to access funds prior to reaching their preservation age and satisfying a condition of release
- The SMSF not investing at ‘arm’s length’. An arm’s length investment is done on a commercial basis at market value. This ensures all assets in the fund are valued correctly.
Can SMSF penalties be disputed?
Any individual SMSF trustee (including corporate directors) have the right to have ATO decisions reviewed, including SMSF penalties. There are three main options for resolving disputes before they reach the litigation stage:
1. Early assessment and resolution
Early assessment and resolution is ideal for less complex penalty disputes. It focuses on the trustees meeting with ATO case officers to further discuss the penalty imposed and the associated evidence of non-compliance.
2. In-house facilitation
This method is also ideal for less complex penalty disputes. It involves an impartial ATO facilitator meeting with the trustees/directors and relevant ATO case officers to identify and hopefully resolve any issues in dispute.
3. Alternative dispute resolution
This method is more appropriate for complex penalty disputes. It typically involves mediation and conciliation conducted by an appropriate external practitioner to identify and hopefully resolve any disputed issues.
The ATO’s approach to SMSF compliance and non-compliance
After putting most of its SMSF compliance activities on hold during COVID, in 2022 the ATO announced it was scaling up its compliance actions. In a speech in October 2022, assistant commissioner of the ATO Justin Micale outlined the main compliance issues on its radar:
- Illegal early access to SMSF funds before meeting a condition of release
- Non-lodgement of SMSF annual returns, “a fundamental obligation for all trustees, including those in retirement phase”.
“Unfortunately, we are seeing an increasing number of trustees taking advantage of their direct access to their superannuation bank account and they are using these savings to pay for items such as business debts, holidays, renovations and new cars.”
Micale forecast an increase in trustees being disqualified for illegally accessing their super, while penalties and interest charges may also apply. He said non-lodgement of returns can be an indicator of broader compliance issues, including illegal early access. As an indication of the scale of the problem, the number of new SMSFs failing to lodge their first returns jumped significantly from 3% in 2013 to over 26% in 2020.
“Lodgement is vital to ensure the fund retains its complying status on SuperFund LookUp as funds who have overdue returns by more than two weeks may have their regulation details removed. This restricts the SMSF from receiving rollovers and employer contributions.”
In line with its prevention first approach, the ATO first reminds trustees of their lodgement obligations via articles and targeted mailouts. The next step is a three strikes letter campaign, beginning with encouragement to take action, followed by a warning of consequences for failing to do so, and finally notice of disqualification and other enforcement action.
In the 2022 financial year, 13,558 funds had a total 39,997 contraventions reported. This was an annual increase of 3.5% and 6.3% respectively. The most common contravention was early access, often reported as a loan to a member.
“We find the main drivers of regulatory contraventions are financial stress, poor record-keeping and a lack of understanding of the rules. As you would expect, we treat a simple mistake very differently from someone who shows a blatant disregard of the law.
“In 2021–22 we disqualified 252 trustees for serious breaches of the law, while other contraventions attracted administrative penalties of around $3.4 million. These consequences can have wide ranging impacts as the disqualifications are published and trustees are personally liable for penalties imposed.
“We also monitor SMSFs with large asset balances and high rates of growth, and investigate situations where individuals seek to inappropriately access concessional tax rates for superannuation via the use of an SMSF.”
Other cases on the ATO’s radar involve undervaluation of assets acquired from related parties, and income from property developments, private company dividends, unit trust distributions and personal services income being inappropriately diverted into the SMSF.
Voluntary reporting of non-compliance is encouraged
To help you monitor your fund’s compliance, the ATO has an ongoing SMSF compliance checklist. If you discover that your fund has not complied with the super rules, then the ATO encourages early voluntary disclosure.
The ATO’s SMSF early engagement and voluntary disclosure service is designed to help you get on the front foot. It allows SMSF trustees (or their auditors or any other professional involved with their fund such as tax agents, accountants or administrators) to voluntarily report any fund non-compliance issues that they become aware of. An SMSF regulatory contravention disclosure form is available from the ATO’s website.
This disclosure can include a proposed plan to rectify the non-compliance and prevent it from happening again. The ATO doesn’t audit funds if the non-compliance is resolved through voluntary disclosure.
Any voluntary disclosure is taken into account by the ATO when determining if a penalty will be imposed on the fund’s trustees and if so the type of penalty.
How to spot a dodgy retirement planning scheme
The ATO has ongoing concerns about illegal retirement planning schemes that target SMSF trustees. To combat this, it has developed the Super Scheme Smart program to educate taxpayers about how to avoid these illegal schemes. Examples of these schemes include:
- SMSFs and related party property development
- SMSF investments that provide members/trustees with present-day benefits, rather than satisfying the sole purpose test
- SMSF investment schemes that encourage SMSF members/trustees to illegally channel funds through their fund to avoid tax.
These types of investments and schemes are serious breaches of super legislation and so attract the most severe ATO penalties.
The ATO can impose a range of penalties on SMSF trustees who don’t set up and manage their funds to comply with super and tax legislation. These penalties vary depending on the seriousness of the non-compliance. The ATO generally prefers to assist SMSFs to fulfil their compliance obligations, but they are prepared to take punitive action for serious breaches. Super funds (including SMSFs) must be compliant to be eligible for tax concessions available under Australian superannuation law.
The information contained in this article is general in nature. It’s best to seek independent professional advice to ensure your SMSF’s ongoing compliance.