ATO SMSF Penalties - change afoot

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From 1 July 2014 there will be a new penalties regime in place for trustees of SMSFs as legislation has been passed by Parliament.  These penalties may be imposed personally on trustees and directors of corporate trustees; and are to be paid out of the trustee's own pocket.

You can see from the table below the penalties are graduated.  Many are quite severe and may put trustees in a position of financial hardship. Trustees in breach may not pay fines out of their super fund accounts (or be reimbursed for such payments out of super fund assets) and may not have the capacity to pay the fines otherwise.

In addition to financial penalties the ATO will have the power to require trustees to undergo education and training in compliance to gain a better understanding of their obligations and responsibilities as Trustees, thereby aiming to avoid breaches of the law in future.

For more serious or repeat breaches the ATO retains existing powers, such as making the fund non-complying, disqualifying Trustees or instigating civil or criminal penalties.

The reason the ATO has sought to expand upon its available penalties can be seen from the Explanatory Memorandum to the legislation:

Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high. The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law. 

The [current] absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected. This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct

 We note in particular the prohibition on super fund borrowing (except as permitted), on lending to related parties,  the In-House Asset rules and failure to notify the ATO of an event that has a significant adverse effect on the fund's financial position.  Note too, the penalties for inadequate record-keeping.  

Section & Rule	Administrative Penalty
s.35B – failure to prepare Financial Statements	$1,700
s.65 – prohibition on lending or providing financial assistance to members & their relatives	$10,200
s.67 – prohibition on super fund borrowing, except as permitted, eg limited recourse borrowing arrangement	$10,200
s.84 – contravention of In-House Asset rules	$10,200
s.103(1) & (2) – failing to keep trustee minutes for at least 10 years	$1,700
s.103(2A) – failure to maintain a s.71E election, where applicable, in relation to a fund with an investment in a pre 11/8/99 related unit trust	$1,700
s.104 – failing to keep records of change of trustees for at least 10 years	$1,700
s.104A – failing to sign Trustee Declaration within 21 days of appointment and keeping for at least 10 years	$1,700
s.105 - failing to keep member reports for 10 years	$1,700
s.106 – failing to notify ATO of an event that has significant adverse effect on the fund’s financial position	$10,200
s.106A – failing to notify ATO of change of status of SMSF, eg fund ceasing to be a SMSF	$3,400
s.124 – where an Investment Manager is appointed, failing to make the appointment in writing	$850
s.160 – failing to comply with ATO Education directive	$850
s.254(1) – Failing to provide the Regulator with information on the approved form within the prescribed time upon establishment of the fund	$850
s.347A(5) – Failing to complete a form with requested information provided by the Regulator as part of the Regulator’s Statistical Program	$850

It will be important for all SMSF trustees to ensure compliance prior to year end in order to avoid these penalties..