Newsletter No. 7, July 2014

The ATO’s new penalty powers in detail

From 1 July 2014, the ATO has new penalties to impose on SMSF trustees who contravene the superannuation law. The new penalties apply to contraventions that occur from 1 July 2014 as well as contraventions that were made prior to 1 July 2014 and remain unrectified.

As I mentioned in my April 2014 newsletter, the old penalty regime only allowed the ATO to take the following limited options on trustees for contravening the superannuation law:

  • issue a notice of non-compliance to the SMSF (i.e. remove the tax concessions)
  • disqualify the trustee
  • accept an enforceable undertaking from the trustee to rectify the contravention
  • take civil or criminal action on the trustee

The old penalty powers do not allow the ATO to take appropriate action based on the severity of the contravention. On the other hand, the new penalty powers allow the ATO to tailor the penalty to fit the contravention. The new penalty powers are:

  • rectification directions
  • education directions
  • administrative penalties

RECTIFICATION DIRECTIONS
The ATO would direct an SMSF trustee to rectify the contravention within a certain timeframe and upon completion provide the ATO with evidence. A penalty of $1,700 will be imposed if the rectification direction is not complied with.

EDUCATION DIRECTIONS
The ATO would direct an SMSF trustee to undertake specific education to improve their superannuation knowledge within a certain timeframe. Then within 21 days of completing the course, the trustee must provide the ATO with evidence and sign a trustee declaration form confirming their understanding of the trustee’s duties. Any costs incurred for the education cannot be paid or reimbursed from the SMSF. A penalty of $1,700 will be imposed if not complied with.

ADMINISTRATIVE PENALTIES
Administrative penalties will be imposed for specific contraventions. The amount of the penalty will vary depending on the seriousness of the contravention. The penalty is applied at the full rate. The trustees or directors of corporate trustees will be personally liable for the penalty ranging from $850 to $10,200. The penalty is not permitted to be paid from the SMSF and must come from the corporate trustee or the personal resources of the company’s directors or individual trustees. If an SMSF has individual trustees, then each individual trustee will be liable for the penalty (e.g. $10,200 penalty x 4 individual trustees = total penalty cost $40,800). If an SMSF has a corporate trustee, then each director will be jointly liable for the one penalty (e.g. $10,200 penalty divided by 4 directors = total penalty cost $10,200). The ATO does have power to remit the penalty and will consider remission based on a trustee’s past compliance history, whether trustees have been reckless or incompetent in the operation of their SMSF; and the likelihood of complying in the future.

The new penalties can be imposed by the ATO in addition to other the enforcement actions.

Just remember that although trustees may rely on their accountant, financial adviser, lawyer or auditor to help them manage their SMSF, the ultimate responsibility and accountability lies with them as trustee of their SMSF. So if you are a trustee of your SMSF and you are planning to take more interest in the superannuation law, it is much better to do it on your own terms than be directed to do so by the ATO.

These are the new penalties listed alongside their relevant section or subsection:

s34(1) – failure to comply with prescribed operating standards $3,400

s35B – failure to prepare financial accounts and statements $1,700

s65(1) – prohibition on lending/providing financial assistance to members and their relatives $10,200

s67(1) – prohibition on borrowing, except as permitted $10,200

s84(1) – contravention of in-house asset rules $10,200

s103 (1),(2) – failing to keep trustee minutes for at least 1o years $1,700

s103(2A) – failure to retain a copy of section 71E election $1,700

s104(1) – failing to keep records of change of trustees for at least 10 years $1,700

s104A(2) – failing to sign trustee declaration within 21 days of appointment and keeping for at least 10 years $1,700

s105 (1) – failing to keep member reports for 10 years $1,700

s106(1) – failing to notify ATO of an event that has significant adverse effect on the SMSF’s financial position $10,200

s106A(1) – failing to notify ATO of change of status of SMSF (e.g. ceasing to be an SMSF) $3,400

s124(1) – failure to appoint an investment manager in writing $850

s160(4) – failing to comply with ATO education directive $850

s254(1) – failure to provide information to the regulator $850

s347A(5) – failure to provide the regulator with statistical information $850

Disclaimer

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.