The Australian Taxation Office’s enhanced range of powers could see an increase in penalties levied against trustees of self-managed superannuation funds (SMSFs), when funds begin lodging returns for the current financial year.
Martin Murden, director of SMSF consulting with Partners Group, says the ATO has in the past been circumspect in using its powers against trustees, because the only options available to it – declaring a fund non complying, or disqualifying trustees – were considered draconian or disproportionate when breaches might be relatively minor.
However, while the ATO has a range of more “subtle” powers available to it, ensuring that the punishment fits the crime better, it has less flexibility when it comes to discretion in exercising those powers.
Last July Matt Bambrick, an assistant commissioner in the ATO’s self-managed super funds division, told an SMSF conference that the regulator would be able to impose penalties that are “more in line with a breach than was previously the case but our discretion on whether or not to apply a penalty is limited”.
Penalty imposed
Bambrick said that not every auditor contravention report would necessarily lead to a penalty being imposed on trustees, but “every ACR that leads to an ATO audit that then confirms an eligible breach will result in an SMSF administration penalty imposed on the trustees”.
Bambrick said the Tax and Superannuation Laws Amendment (2014 Measures No.1) Act 2014 had given the ATO three new regulatory compliance powers: education directions; rectification directions; and administrative penalties.
“If you come across a contravention, fix it,” Bembrick said.
“If it’s too late, then talk to us. We will work with you to avoid the worst outcome where we can. Our primary interest is the compliance of the fund. For penalties to be imposed there will usually need to be an unrectified contravention or repeat contraventions that lead us to start audit action.”
Murden says it is important to note that trustees themselves, not the fund, are liable for the fines imposed by the ATO. The highest fine is $10,200 per trustee, not per fund. He says that although the ATO’s new powers came into effect on July 1, 2014, it will not be until the next round of audit reports are completed – for the 2014-15 financial year – that the ATO will be alerted to breaches and begin levying penalties.
Appropriate qualifications, education
The practical result of the changed ATO powers will be more penalties imposed on trustees, and a greater need than ever for the advisers to trustees – including accountants and financial planners – to be appropriately qualified and educated.
Partners Group’s regular analysis of a sample of the SMSFs that it audits has found a clear and steady decline in the proportion of funds in breach – from 11.3 per cent in 2008 to 5 per cent in 2014.
“I think partly it’s because people are becoming better educated – not only trustees of super funds, but their advisers,” Murden says.
However, there are still specific areas that are misunderstood, Murden says. From an analysis of about 600 of the roughly 2000 funds it audits, Partners Group has uncovered a spike this year in breaches of borrowing rules.
He says there is commonly confusion about the in-house assets test – which says, in effect, that a fund can invest or lend no more than 5 per cent of its assets to a related business – and loans to individual members, which are banned outright.
Murden says Partners Group’s research found that 23 per cent of funds had made personal loans to members, and the in-house assets rule was breached by about 20 per cent of funds. But it noted that these figures were “well down on last year when they were 32 per cent and 36 per cent, respectively”.
