A change in powers available to the ATO has provided yet another extremely compelling reason for changing from individual trustees to a corporate trustee. The ATO can now impose administrative fines, or speeding tickets as we like to refer to them, on each trustee of an SMSF. It means one fine will be issued for a corporate trustee or a fine for every individual SMSF trustee.
Speeding tickets are officially here!
On 18 March 2014, a royal assent was given to the Tax & Superannuation laws Amendment (2014 Measures NO 1) Bill 2014, ushering in new powers for the ATO to give directions and impose administrative penalties for contraventions relating to SMSFs’.
This means effective from 1 July 2014, a breach by an SMSF reported in an auditor contravention report can result in the trustees of the fund being personally liable to pay significant fines of up to $10 200 each.
Secondly, making the fund non – complying would penalise all the members of the fund even though on the face of it all fund members are also trustees (or all directors of the corporate trustee, as the case may be) of the fund.
In practice, if the contravention essentially related to the actions of one particular member who effectively controlled the fund, it would be patently unfair for all the other members to suffer the same consequences.
Thirdly, applying to the court for a imposition of a civil penalty or a criminal penalty involves expensive, time – consuming and uncertain legal action.
The practical results to date has been that the ATO has really only resorted to these sanctions in cases of significant non – compliance with the superannuation laws that remained unrectified for a significant period of time, such as in the matter of JNVQ and the Commissioner of Taxation (2009) AATA 522.
In that case, an SMSF had loaned funds to a related – part entity and the funds loaned in total were greater than 95 per cent of the assets of the SMSF, resulting in a breach of the in – house assets test as per section 84 of the SIS Act. The loans remained outstanding for some years. The issue of a notice of non – compliance was confirmed by the Administrative Appeals Tribunal with all the consequential adverse complications adverse implications for the taxation of the fund.
From the prospective of the SMSF, the situation was also unsatisfactory as the resulting all – or – nothing approach meant there would be an uncomfortable uncertainty as to whether or not the ATO would apply the ultimate penalty in the event of a minor breach of the superannuation regulations, even if the breach had been rectified at the time it was reported by the fund’s auditor.
So what are the new penalties?
The new powers are contained in a new part of the SIS Act and apply to contraventions occurring from 1 July 2014. They cover:
· Administrative penalties (section 166), and
· Education directions (section 159).
They also apply to contraventions made prior to 1 July 2014 and continue after that date.
- Administrative penalties
There are 17 administrative penalties, which are set out in the table in section 166.
Under section 4AA of the Crimes Act 1914, a penalty unit currently means $170.
If a trustee of an SMSF is liable to an administrative penalty and is a body corporate, at the time it becomes liable for the penalty, are jointly and severally accountable to pay the amount of the penalty (section 169).
Importantly, these penalties cannot be paid using resources of the SMSF (section 168). Doing so would be considered a serious breach in itself and likely to attract more significant penalties from the ATO.
- Rectification directions
The ATO may give a rectification direction where it is reasonably believes a trustee or director of a corporate trustee of an SMSF has contravened a provision of the SIS Act (sections 159 & 160).
A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the ATO with evidence of the person’s compliance with the direction. The rectification direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances (section 159).
- Education directions
An education direction will require a person to undertake a specified course of education within a specified time frame and provide the ATO with evidence of completion of the course. The education direction must specify the period within which the person must comply with the direction and must be a period considered reasonable under the circumstances (section 160).
The ATO may approve courses for the purposes of education direction (section 161). If a person undertakes a course of education in compliance with an education direction, the person must ensure none of the costs associated with undertaking the course are paid or reimbursed from the assets of the fund (section 162).
What should SMSF trustees and their advisors do now?
Here are a few practical tips for SMSF trustees and their advisors:
• To avoid these penalties, ensure your SMSF is fully compliant with the superannuation laws from 1 July 2014 so the trustees do not become liable for a penalty or other sanctions.
• Given the penalties will also apply to contraventions that were made prior to 1 July 2014 and continue after that date, trustees and their advisors should ensure all contraventions are rectified as soon as possible and no later than 30 June.
Having said this, the ATO advises that if the trustees are making progress in resolving one or more contraventions by 1 July 2014, it will consider these circumstances in any request to remit any imposed administration penalties.
How can we help?
If you need assistance, please feel free to give me a call on 1300 366 316 or contact me to arrange a time to meet so that we can discuss your particular requirements in more detail.
John Siemon FCPA SSA