Self managed superannuation fund penalty regime

In a bid to improve the operational efficiency and integrity of the Self Managed Superannuation Fund (SMSF) sector, the Australian Taxation Office (ATO) has introduced a new penalty regime from 1 July 2014. The penalties have been introduced to reduce non-compliance with the Superannuation Industry (Supervision) Act (SISA). The SISA contains covenants that are automatically assumed to be detailed within an SMSF’s trust deed. The covenants require you as a trustee to:

  • Act honestly
  • Act in the best interest of the beneficiaries
  • Maintain the SMSF’s assets separately from the assets of the trustees
  • Develop and implement an investment strategy for the fund
  • Comply with any other duties within the SISA

If, during the annual audit of your SMSF, a breach of the SISA was to be found by the auditor – the ATO would be required to issue a penalty direction to you as a trustee. Penalties can include: a rectification direction, education direction or administrative penalty direction.
A rectification direction requires you, as trustee, to rectify the contravention identified, and to provide evidence of the rectification to the ATO. If you do not comply within the time period specified in the direction, you can be issued with a monetary penalty.

Different to a rectification direction, an education direction would require you to undertake an approved course of education within a set time frame. You must provide evidence of course completion to the ATO, and if not complied with, the direction will attract a monetary penalty.

While a rectification or education direction may take up the time and energy of a trustee, administrative penalties are of most concern, due to these being more likely to be issued.
If a trustee contravenes a provision of the SISA within section 166 (s2), administrative penalties will be issued to the trustee of the fund. Penalties range from $850 for non-compliance with a regulation direction, to $10,200 for lending to members or breaching the in-house asset rules.

While the contravention may relate to the SMSF, it is you as a trustee, who is ultimately liable for any administrative penalties issued. The penalties cannot be paid out of the fund, or reimbursed from any assets of the fund. Additionally, if there are two trustees to a fund, both will be issued penalties. One way to avoid this, is to appoint a corporate trustee. Only the corporation as the trustee will be issued the penalty, effectively halving the amount to be paid.

Small breaches can be costly, as the ATO does not have discretion to reduce or withhold penalties dependent on circumstances. If your SMSF auditor is inexperienced and reports insignificant contraventions when not required, this can lead to unnecessary penalties for you.

For more information on the new penalty regime or any SMSF issues, contact Imogen or any of the AFS team.