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SMSF trustees can face a range of penalties if their funds aren’t set up and managed to comply with superannuation and taxation legislation. These penalties are imposed by the Australian Taxation Office (ATO).
Non-compliance penalties are in place to deter trustees from illegally taking advantage of the tax concessions available under Australian superannuation law. Member contributions and fund earnings for compliant super funds (including SMSFs) are taxed at the concessional super rate of 15% in Australia (up to certain contribution limits).
An overview of SMSF penalties
The range of SMSF penalties that can be imposed by the ATO for SMSF non-compliance include:
- Educational directions
- Enforceable undertakings
- Rectification directions
- Administrative penalties
- The issuing of non-compliance notices
- The freezing of the fund’s assets
- Trustee disqualifications
- The winding up of the fund
- Civil and criminal penalties
We will now look at each of these penalties in more detail.
SMSF trustees who have overseen the non-compliance of their fund can be directed by the ATO to undertake an online educational course to reduce their risk of future non-compliance. These courses must be completed through an approved provider within a specified timeframe.
Trustees completing these courses must provide the ATO with evidence that they have completed the course within 21 days. They must also re-sign their trustee declaration to indicate that they understand all their legal obligations.
Failing to comply with an educational direction currently incurs a fine of $2,200.
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, and to
- Implement strategies to prevent the non-compliant behaviour from happening again.
It is up to the ATO to decide whether or not to accept the enforceable undertaking of trustees. Factors that the ATO considers in making this decision include:
- The trustee’s compliance history,
- The extent of the non-compliance (e.g. whether there are criminal consequences), and
- 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 the 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 when it has been done.
Trustees who fail to comply with rectification directions can potentially be disqualified and their fund can also be exposed to significant tax penalties.
Individual and corporate trustee directors are subject to individual financial penalties if they contravene any of the provisions of the Superannuation Industry (Supervision) Act 1993. Different types of breaches carry different penalties.
Penalties are assigned a number of penalty units ranging from 5 to 60. Each penalty unit currently has an associated fine of $210. So a breach of five penalty units attracts a financial penalty of $1,050 and breach of 60 units attracts a penalty of $12,600.
Penalty unit fines have steadily been increasing over time, as highlighted in the table below.
|Date when infringement occurred||Penalty unit amount|
|Up to 27 December 2012||$110|
|28 December 2012 to 30 July 2015||$170|
|31 July 2015 to 30 June 2017||$180|
|On or after 1 July 2017||$210|
It’s important to note that any financial penalties must be paid from the personal savings of an SMSF’s trustees, not from the fund.
It’s also important to note that the financial penalties for the same offence are more severe for SMSFs with an individual trustee structure 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 structure 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 (i.e. a fine of $2,100). This fine will be applied to each of the individual trustees of the first super fund (i.e. they will be required to pay $2,100 each, so the breach effectively attracts a total fine of $8,400).
However, the $2,100 fine will be applied to the second fund’s corporate trustee as a single entity, to be shared among each of the four directors. They will each be liable for only $550 each.
Issuing non-compliance notices
The ATO can issue an SMSF with a non-compliance notice for serious breaches of SMSF legislation. A non-compliance notice has serious financial implications for fund members/trustees. The income of funds classified as being non-compliant is taxed at the highest marginal tax rate (45%), instead of at the concessional super rate of 15%.
This higher level of taxation will be charged until the fund is wound up or classified as being compliant.
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 that their conduct is adversely affecting the performance or compliance of the fund. This effectively means that the trustees cannot buy, sell or deal with the fund’s assets in any way while they are deemed by the ATO to be 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 is an offence for a person to continue acting as an SMSF trustee if they have 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 that is regulated by the Australian Prudential Regulation Authority (APRA).
Civil and criminal penalties
Serious breaches of superannuation legislation can result in the ATO applying apply 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 any of their fund members die 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 (i.e. at true market value). This ensures that all the assets in the fund are valued correctly.
Can SMSF penalties be disputed?
Any individual SMSF trustee (including corporate directors) have the right to have any ATO decision reviewed, including SMSF penalties. There are three options for resolving ATO 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 in an attempt to further discuss the penalty imposed and the associated non-compliance evidence.
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 that are in dispute.
3. Alternative dispute resolution
This method is more appropriate for more complex penalty disputes. It typically involves mediation and conciliation that is conducted by an appropriate external practitioner to identify and hopefully resolve any disputed issues.
The ATO’s philosophy toward SMSF compliance and non-compliance
The Assistant Commissioner of the ATO outlined the ATO’s philosophy toward SMSF compliance and non-compliance in a 2016 address to the Tax Institute.
Key extracts from that address are provided below.
Our philosophy is to deal with minor contraventions in a collaborative way to help trustees to rectify them. Through initiatives such as our early engagement and voluntary disclosure service we seek to empower the individual to work with us to promote voluntary compliance.
In practical terms what this means is that for less serious breaches, particularly if it is the first time, we accept enforceable undertakings, or issue education or rectification directions. However, for more serious, deliberate or persistent regulatory breaches we take firm action.
The most serious enforcement actions available to us are disqualifying trustees and making funds non-complying.
We disqualify trustees in relevant cases so that we can remove from the sector those individuals who ignore their obligations and responsibilities as trustees. We also increasingly use this power when examining the fitness of new entrants through our new-registrant integrity checks. These actions are critical to the integrity of the SMSF industry.
Considering there are nearly 600,000 SMSFs, the number of funds we make non-complying is relatively small. This reflects our approach of reserving this action for the most serious cases of non-compliance.
The Assistant Commissioner of the ATO further clarified the ATO’s position on monitoring SMSF compliance in a speech to the Tax Institute in 2017. This speech was delivered just before significant changes to super legislation were about to be introduced (such as the reduction to the concessional (pre-tax) and non-concessional (after-tax) contributions caps), as well as the introduction of the transfer balance cap).
Key extracts from that speech are provided below.
As is always the case when implementing legislative changes there is significant interest in the ATO’s approach to monitoring and taking action on non-compliance with the super changes.
The first point to note is that while we take non-compliance seriously, our ‘prevention before correction’ approach reflects our preference to provide proactive help, educate and support to foster willing stakeholder participation and collaboration to promote voluntary compliance.
The various tools and support we are planning to, or have started, putting in place are evidence of our preference that trustees and professionals understand the super changes and can comply.
However, as we all know, even the best of us can make mistakes; the ATO is fully committed to assisting those who have made mistakes to self-identify and more importantly self-rectify.
The SMSF Early Engagement and Voluntary Disclosure Service isn’t just there for longer term historic issues it is there for any situation where members of their professionals identify a failure in compliance and want to work with us to provide certainty about the resolution. You can access the online form for this service on our website.
In regards to the super changes, where clients work with us openly we’re unlikely to apply penalties and other sanctions unless there is no legislative discretion.
We recognise that these changes are significant, so mistakes will be made. We can only encourage trustees and professionals to approach us for advice, and where there is clear evidence of a willingness to comply or appropriately rectify errors, we’re likely to take a lenient view in terms of applying penalties or more serious outcomes, particularly in the initial phase after implementation.
We, and by that I mean the ATO, and you as key professionals should encourage trustees and your colleagues to get good guidance, come to the ATO for advice when they are unsure and engage with us openly when they’ve made mistakes.
While I’ve said our overall approach will be one of guidance, support and working collaboratively to address mistakes, there are behaviours that concern us, and we will take action as you would expect.
What is the SMSF early engagement and voluntary disclosure service?
The SMSF early engagement and voluntary disclosure service is offered by the ATO. 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. This disclosure is done by completing and submitting an SMSF regulatory contravention disclosure form that is available online via the ATO’s website.
This disclosure can include a proposed plan to rectify the non-compliance and to prevent it from happening again in the future. The ATO does not audit funds if the non-compliance is subsequently 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.
What is the ATO’s Super Scheme Smart?
The ATO’s Super Scheme Smart is a program to educate taxpayers about how to avoid illegal schemes that are increasingly attempting to target SMSFs. Examples of these schemes include:
- 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 SMSFs for the purpose of avoiding tax.
These types of investments and schemes are serious breaches of superannuation legislation and therefore 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 superannuation and taxation legislation. These penalties vary depending on the seriousness of the non-compliance. The ATO generally prefers to provide assistance to support SMSFs to fulfil their compliance obligations, but they are prepared to take stern action for serious breaches. Compliant super funds (including SMSFs) are entitled to receive the tax concessions available under Australian superannuation law.
It’s best to seek independent professional advice to ensure your SMSF’s ongoing compliance. The information contained in this article is general in nature.