The ATO has many weapons in its arsenal when it comes to regulating Self Managed Super Funds. One of the most frequently used has increased in cost from July 1, 2017 for defaulting trustees of SMSFs by almost 17 per cent.
The ATO’s ultimate weapon of mass destruction, similar to what the nuclear deterrent was during the Cold War, is making an SMSF non-complying which results in members effectively losing almost 50 per cent of the value of their fund in penalties.
History has shown that the ATO tends to only make an SMSF non-complying in extreme circumstances when trustees refuse to take corrective action. The new penalty regime, that was meant to apply from July 1, 2013 but due to the normal wrangling and political manoeuvring that afflicts Canberra, was not introduced until July 1, 2014.
The penalty regime gives the Commissioner of the ATO the power to:
- impose administrative penalties without reference to a court,
- require trustees to take specific action to correct breaches, and
- require trustees to undertake education activities.
The penalties that can be imposed by the ATO are a multiple of the Commonwealth penalty unit, with the multiple depending on the seriousness of the offense. These penalties range from five penalty units up to a maximum of 60 penalty units.
The contraventions where five penalty units are imposed include such minor breaches as not appointing an investment manager in writing, not complying with rectification directions, not providing information to the regulator, and not completing survey forms or complying with education directions.
Contraventions where 10 penalty units are imposed include the failure to prepare and retain specified accounting statements, minutes or records for individual and corporate trustees, copies of elections, changes of trustees, trustee’s duties declarations, and members benefit reports.
The more serious offenses that result in a penalty of 60 units include providing financial assistance to members, borrowing funds, breaching the in-house asset rules, and failure to notify the ATO of significant events such as a fund no longer meeting the legal definition of an SMSF.
The value of penalty units had not been increased for 15 years, but in December 2012 the value was increased to $170. After dragging the chain it is obvious that the government recognised it was missing out on a valuable revenue source, as the value of penalty units increased in July 2015 to $180, and have from July 1, 2017 increased to $210.
Under the penalty regime the fines are imposed on either the individual trustees of the SMSF or the directors of a corporate trustee. With the penalty unit increasing to $210 the fines now range from $1050 up to $12,600.
The ATO does not publish specific statistical information in relation to how many and the value of fines imposed on trustees each year. An ATO spokesman was however able to confirm, “in 2016/17 approximately $1.6m in administrative penalties were imposed on SMSF trustees who were found to have contravened the superannuation laws, particularly inappropriate use of fund assets and related party dealings”. On the basis of a penalty unit being $180 this means at least 8900 SMSF trustees were fined over the 2017 financial year.
Although the ATO has the ability to impose penalties the spokesman said that they would rather, “encourage trustees to seek guidance from their professional advisors and engage with the ATO early using our SMSF Early Engagement and Voluntary Disclosure service to reduce the risk of becoming liable to any administrative penalties”.
It is therefore important for advisers to educate clients on the importance of fixing errors and non-compliance in the SMSFs, rather than trying to either hide the facts or ignore contraventions of the rules.
