Newsletter No. 4, April 2014

New Powers to the ATO

More power to the Australian Taxation Office (ATO) is not a bad thing.   No, I’m not joking. The ATO having more penalties to choose from is a good thing for Self Managed Superannuation Fund (SMSF) Trustees.

Prior to September last year, I spent 17 years working as a technical adviser and compliance officer in the Superannuation Business Line of the ATO.  One of my roles was to audit SMSFs and investigate whether they have complied with all the requirements of the superannuation law.

I came across many SMSF trustees who failed to do the right thing either because they did not take an interest in the superannuation law or did not understand the law.  There were also some that followed incorrect advice provided to them.

I dealt with many situations ranging from SMSF trustees making genuine mistakes due to not understanding the law to trustees who displayed a blatant disregard of the superannuation law.  A lot of these SMSF trustees were not bad people, some were just careless, ignorant of the law, in financial difficulties, had experienced business failures, faced relationship breakups, or had serious gambling or other addictions.  It wasn’t like they had murdered anyone or hurt anyone, they were just jeopardising their own retirement savings.

The problem I faced while working for the ATO was that back then the ATO had limited powers to take appropriate action on SMSF trustees for non-compliance with the superannuation law. The ATO as the regulator of SMSFs supervises SMSFs to ensure compliance with the superannuation law in order for SMSFs to receive taxation concessions on contributions, earnings and benefit payments.    The ATO must take action if it encounters non-compliant SMSFs.

You see, under the old laws, the ATO was limited to taking the following actions when it encounters non-complaint SMSFs:

  • Disqualify an SMSF trustee.  By doing this it means, the individual can never establish and run an SMSF again and act as an SMSF trustee.
  • Issue a notice of non-compliance to the SMSF.  By doing this the members of the SMSF will lose almost half of their accumulated superannuation savings in their SMSF by having to pay a tax liability due to tax concessions being removed from the SMSF.
  • Prosecute the SMSF trustee for civil or criminal penalties.
  • Accept an enforceable undertaking from an SMSF trustee to rectify the contravention.  This would only occur for a minor contravention that can be rectified within a short period of time.

Last financial year, the ATO disqualified 440 individuals from being SMSF trustees and issued 150 SMSFs with notices of non-compliance.  There were also quite a few court actions.

It always seemed odd to me that the government wanted to protect the retirement savings of SMSFs but then had a penalty provision that took half of those savings away in the event of non-compliance.

However, under the new laws the ATO now has additional penalties it can administer which are far more reasonable. The ATO can now do the following additional things:

  • Give an SMSF trustee a “rectification direction”.  This will allow the SMSF trustee to rectify contraventions within certain time period and provide the ATO with proof of the rectification.
  • Give an SMSF trustee an “education direction”.  This will require the SMSF trustee to undertake a superannuation course within a certain time period.   The SMSF trustee would  not be able to pay for the course using money in the SMSF.  The cost of the course will have to be funded by the trustee personally.  Also upon completion of the superannuation course, the trustee must provide evidence of completion and make a signed trustee declaration confirming that they understand their duties as trustees.
  • Impose new administrative penalties.  The new penalties vary depending on the type of contravention.  The penalties must be paid by the SMSF trustee personally and cannot be paid using the money in the SMSF.  The penalties range from a fine of $850 up to a fine of $10,200.

The new penalties will take effect from 1 July this year.  These laws do not stop the ATO from taking action on SMSF trustees under the old provisions.  They simply give the ATO additional actions to take on SMSF trustees.

Monica Rule worked for the ATO for 28 years and is a Self-Managed Superannuation Specialist Advisor. Monica is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” www.monicarule.com.au. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions.