SMSF trustees can expect harsher fines from this financial year (2017/2018 year) onwards with administrative penalties of up to $12,600 per trustee (including corporate trustee) for a breach of the super rules. The value of a penalty unit increased to $210 (from the previous $180) since 1 July 2017.
A SMSF trustee must run his or her super fund according to the superannuation rules. If a SMSF trustee breaks those super rules, financial penalties and other consequences may apply. When a SMSF trustee breaches certain super rules, the SMSF trustee can expect to be automatically hit with an administrative penalty ranging from $1,050 (and $900 before July 2017), and up to $12,600 (and $10,800 before July 2017), depending on the breach.
Although the administrative penalty provisions imposing monetary fines have been in place only since July 2014, the government has already twice increased the size of the penalties for breaking the super rules, with some penalties increasing by hundreds of dollars. The penalty unit applicable to administrative penalty provisions for SMSF trustees started off at $170 per unit from 1 July 2014, then increased to $180 from 31 July 2015, and has now increased to $210 since 1 July 2017.
How do the penalty units operate?
For the 2014/2015 year, and also up to 30 July 2015, each penalty unit was worth $170. As a SMSF trustee, if you broke the super borrowing rules during the 2014/2015 year, you could then be up for $10,200 as a financial penalty (60 times $170).
The increase in the amount of the financial penalties to $180, effective from 31 July 2015, related to how the super laws stipulate the size of the financial penalties. For example, the penalty for breaching the borrowing rules within super is 60 penalty units.
Effective since 31 July 2015 and applicable until 30 June 2017, the value of a penalty unit increased to $180, adding a further $600 to a fine based on 60 penalty units. Using the earlier example, as a SMSF trustee, if you broke the borrowing rules from 31 July 2015 onwards until 30 June 2017, you can be fined $10,800 each for this same breach.
Effective since 1 July 2017, the value of a penalty unit increased to $210, adding a further $1,800 to a fine based on 60 penalty units. Using the earlier example, as a SMSF trustee, if you break the borrowing rules from 1 July 2017 onwards, you can be fined $12,600 each for this same breach.
Important: According to the legislation (and the ATO), the value of a penalty unit was to be increased every three years in line with increases in the Consumer Price Index, which meant SMSF penalties would increase again from 1 July 2018. Since the 2016 Federal Budget announcement, resulting in a dramatic increase in the value of the penalty unit (from $180 to $210) since 1 July 2017, the 3-year automatic indexation process from 1 July 2018 has been deferred, and instead starts from 1 July 2020. On 1 July 2020, and on 1 July every 3 years after 1 July 2020, the value of the penalty unit will be automatically indexed.
What type of SMSF trustee behavior is subject to administrative penalties?
Administrative penalties apply to SMSF trustees for a long list of bad behaviour including:
- failure to properly prepare financial accounts and statements (10 penalty units: $2,100 each since 1 July 2017, or $1,800 each until 30 June 2017)
- failure to keep SMSF money separate from personal assets (20 penalty units: $4,200 each since 1 July 2017, or $3,600 each until 30 June 2017)
- provision of loan to member or relative of members (60 penalty units: $12,600 each since 1 July 2017, or $10,800 each until 30 June 2017)
- failure to keep proper trustee minutes and records (10 penalty units: $2,100 each since 1 July 2017, or $1,800 each until 30 June 2017)
- failure to sign the SMSF trustee declaration within 21 days of becoming a SMSF trustee (10 penalty units: $2,100 since 1 July 2017, or $1,800 until 30 June 2017).
SMSF trustees need to be aware that the financial penalties cannot be paid from SMSF assets: instead the penalties are imposed on SMSF trustees directly and must be paid from personal savings.
Important: If the SMSF involved in the breach has individual trustees, then each trustee is required to pay the fine. For example, where a SMSF has breached the lending rules, and the SMSF has four individual trustees, then each of the four SMSF trustees is liable to pay a $10,800 fine, totalling $43,200. Again, noting that the penalty must be paid from personal savings, rather than SMSF assets.
ATO can force trustees to fix breaches, or to undergo education
Since 1 July 2014, the ATO can also impose a ‘rectification direction’ on a SMSF trustee, which requires the trustee to complete a specific action to fix the breach of the super rules within a specified timeframe.
The third limb of the relatively new ATO powers involves mandatory SMSF trustee education. The ATO can issue an ‘education direction’ forcing a SMSF trustee to attend an approved course within a specified timeframe.
The SMSF administrative penalties may seem hefty but the new regime of financial penalties and rectification and education orders is a more lenient approach than what was in place before July 2014.
Until 30 June 2014, the powers available to the ATO when punishing SMSF trustees, was limited and heavy-handed. A SMSF could potentially lose half of the fund’s assets in the form of penalty tax, or the ATO could disqualify a person from acting as a SMSF trustee or the ATO could take a SMSF trustee to court which could mean a hefty fine or jail sentence. The hard-core penalty options are still available to the ATO, but since July 2014, the ATO can now also impose a range of financial penalties, or rectification or education orders.
ATO’s approach when imposing SMSF administrative penalties?
ATO Assistant Commissioner, Kasey Macfarlane, spoke at a recent conference explaining that the ATO’s compliance philosophy is that of ‘prevention rather than correction’, while also noting that the ATO needs to take appropriate enforcement action when SMSF trustees are not willing to comply with the law, or SMSF trustees are deliberately ignoring their obligations.
Ms Macfarlane said “Our experience is that SMSFs are generally focused on building and protecting their retirement savings and are in the main predisposed to complying with their obligations and working with us to address issues and problems willingly. Our preferred approach is to support SMSFs to establish and maintain good compliance from the outset; we have no interest in catching trustees or advisers out by surprise”.
The ATO has introduced several initiatives to encourage SMSF trustee participation including:
- SMSF early engagement and voluntary disclosure service. According to the ATO, this is “a one-stop shop and single entry point for SMSFs to come to the ATO as they identify a regulatory issue in their fund and engage and work with [the ATO] to rectify the issue before it becomes more significant and complex”. For more information, see this link on the ATO website.
- Super Scheme Smart. In July 2016, the ATO launched an initiative “focused on educating individuals and advisers about the potential pitfalls of some retirement planning schemes”, such as dividend stripping, non-arm’s length limited recourse borrowing arrangements and diversion of personal services income.
In an earlier speech, in September 2016, Ms Macfarlane reported that since the introduction of administrative penalties from July 2014, there was a 38% reduction in the number of SMSFs with enforceable undertakings, but a 70% increase in the number of rectification directions, and a 54% increase in the number of education directions issued to SMSF trustees. Only a few hundred SMSFs have been hit with administrative penalties since July 2014 until presumably September 2016.
Again, in August 2015, the then-ATO Commissioner for SMSFs, Kasey Macfarlane, spoke at a conference explaining how the ATO will impose the SMSF administrative and other penalties. Ms MacFarlane used the example of when a SMSF trustee lent SMSF money to a fund member or a relative of a fund member, which is a serious breach of the super rules.
In such an instance, where the SMSF trustee is a corporate trustee, the directors of the corporate trustee are ‘jointly and severally liable to pay the penalty’ for the breach. According to Ms MacFarlane, what this means is that the ATO may collect the entire penalty amount from only one of the directors, or any of the directors, until the penalty is fully paid.
The ATO may consider remitting the penalty taking into account the compliance history of the SMSF, and any rectification action by the SMSF trustees, and any other relevant circumstances. Ms Macfarlane warned however that as the ATO audits more SMSFs, she expects more SMSF administrative penalties to be imposed, with requests for remission to be denied where non-compliance is serious, or the request relates to repeated compliance breaches.
For more information on SMSF compliance and penalties see the following SuperGuide articles: