(03) 9020 2905PORTFOLIO POINT: New, and broader, penalties for naughty SMSF trustees arrive on July 1. Why is this a good thing
Who’s been a naughty boy then?
The arsenal available to the Tax Office to punish wayward self-managed super fund trustees is to be expanded. And the broader weaponry makes more sense.
Dare I say it, the new penalties are actually good news for self-managed super fund trustees.
While the concept surrounding the new rules was announced nearly a year ago, the draft legislation – which is an update to the Superannuation Industry Supervision (SIS) Act – has only just been released.
From July 1, the ATO is going to be able to impose financial penalties for more offences. And they’re also going to be able to send you off to be “re-educated”. (And, no, it doesn’t appear to be Iron Curtain/gulag stuff, but real courses to help SMSF trustees understand their roles and responsibilities.)
The penalties available to the ATO commissioner have been considered to be too limited. The aim of the new enforcement rules, while an expansion of the current penalty regime, introduce more of a carrot and stick approach for the ATO by allowing the ATO to use smaller, targeted penalties.
The three, new, broad powers are that the ATO will be able to issue “rectification directions”, “education directions” and broader “administrative penalties” that penalise the trustees themselves, rather than the fund.
Education directions
The number of SMSFs has been growing exponentially for a long time. Some people make that decision to open a SMSF themselves. Some open their SMSFs after following the advice of financial advisers and/or accountants.
But the level of knowledge of those taking on their role of trustees has always been a concern to the ATO. They are often starting with less than optimal knowledge. A significant concern is that few then go on to actually learn much at all – and worse, don’t have professional SMSF advisers helping them with their decisions.
The ATO is going to be able to send trustees on the naughty list off for re-education – expect an explosion of new ATO-approved courses – to help with the education process. I’ve previously looked at the suggestion that SMSF trustees could be required to do a course BEFORE they are allowed to open a SMSF, which has thankfully never been considered particularly seriously.
We don’t have detail on what those courses are yet, or how long they’ll be, or how much they’re going to cost.
However, they can be used when the ATO has developed a clear sense that trustees don’t actually understand what they’re doing and have made mistakes as a result.
If the trustees don’t complete the course, they can cop a fine of $1700 and an administrative penalty of $850. Once they’ve done that course, they will need to re-sign a trustee declaration form to say that they understand their duties, which SMSF trustees have had to sign in recent years before opening their fund. Failure to do so could lead to another fine of $1000.
The legislation specifically says that any fines arising from these new enforcement rules must be paid for by the individuals and cannot be reclaimed as an expense from the SMSF. Ditto with any travel or actual course expenses incurred.
Rectification directions
The ATO is also going to be able to make specific directions on how to fix a problem. I’m incredulous that they haven’t always had these powers.
The “rectification directions” can spell out the exact nature of what needs to be done and nail it to a timeframe. The costs of complying with the work must be borne by the trustee, not the SMSF.
And failure to meet requests comes at a price of $1700 per breach. I would think it unlikely that rectification requests will rarely be one breach. There could, potentially, be dozens of requests each time the ATO investigates your fund and finds you worthy of a breach notice.
Administrative penalties
One penalty unit will be worth $170. And getting something wrong, that is considered to be an “administrative breach”, will cost you between five and 60 units. That’s $850 to $10,200.
Failing on the “prohibition of loans to related parties”, or disposing of assets to a related party, will cost you $10,200. Not having accounts acceptably up-to-date will set you back $1700. Breaking the prohibition against borrowing is $10,200.
Failing to notify of a significant adverse event is $10,200 and breaching the “in-house assets test rule” is the same amount.
You can also be fined $1700 for not recording the proper changes for trustees, or failing to failing to sign the “trustee declaration requirements”.
As you would expect, there’s a comprehensive list, which I can’t detail here.
However, the ATO has the ability to levy these penalties per trustee (whether individual or directors of the corporate). So, if you can potentially multiply these by up to four. And, remember, they must be paid for by the trustee as an individual, not from the SMSF’s assets.
Why the new penalties are good for SMSF trustees
Many in the industry have argued that the ATO simply hasn’t had enough breadth to be able to distinguish between trustees who have mistakenly erred … and those trustees who are simply brats, who don’t care about the rules.
These fines give the ATO much broader discretion – even if some of the rulings say the ATO does not have discretion on penalties for some matters – and should allow the ATO to provide more consistent warnings across the industry.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au