Briefly, what are the legislative changes?
The legislative changes provide the ATO with a more flexible range of penalties and directions. In short it will gain "Rectification Direction", "Education Direction", "Administrative Penalty" and "Illegal Early Release Promoter Penalty".
This measure was included in the Tax and Superannuation Laws Amendment (2014 Measures No.1) Bill 2014, which was introduced into Parliament on 26 February 2014. The Bill passed through the Parliament on 6 March 2014 and received Royal Assent on 18 March 2014.
What is a 'rectification direction'?
This allows an ATO auditor to require SMSF Trustee(s) to take a particular action by a specified time to comply with regulatory requirements (the SIS Act and SIS Regs). These actions could include selling an asset by a specified time.
Previously the ATO had to rely on a client requesting an "Enforceable Undertaking (EU)" outlining their rectification plan. While EUs will continue the ATO can now impose conditions on the trustees if an agreement cannot be met. Trustees might want to propose an EU before the ATO determines its own requirements for rectifying the breach.
What is an 'education direction'?
If in the case of an audit or a review where the ATO determines that a trustee has not shown enough care or knowledge regarding their duties, we can direct the Trustee to attend an approved education course. The education course will be online and free and it is expected there will be public sector associations who will offer an ATO approved SMSF Trustee course. Verification of completion and/or passing the course will be required. Trustees will probably be given up to 3 months to undertake the course. This power is to avoid the ATO having to disqualify trustees.
When do the changes take effect?
The ATO expects that the direction powers come into effect on Royal Assent, however for practical purposes the ATO will not impose until 1 July 2014. The Administration penalty powers will commence on 1 July 2014. Any listed breach (see below) still occurring on 1 July 2014 will potentially be subject to administration penalties. For example, a loan to a member that occurred in June 2007 and not repaid by 1 July 2014 will be subject to the new penalties.
How will the amount of the penalty be determined?
The penalties will be determined by the breach. The amount of the penalty will be the amount specified in the law — the minimum is 5 penalty units (currently $850) and the maximum is 60 penalty units (currently $10,200).
The ATO will impose the full penalty amount regardless of the amounts involved in the breach as per legislation. The Commissioner will on request make a remission decision based on the individual circumstances of the case, including the trustee's compliance history and the circumstances surrounding the contravention, including whether it is rectified.
The Commissioner's remission approach has yet to be finalised. That said the Commissioner will adopt a practical approach when considering any remission of the administrative penalty. Remission decisions will be made in observance of prudent risk management principles and in the context that each trustee is ultimately responsible for ensuring that their fund complies with the SIS Act and other relevant legislation.
Can you explain how penalties will be imposed on individual SMSF trustees as opposed to SMSF corporate trustees?
The penalty will be imposed on every trustee. For example:
- For an SMSF with 4 individual trustees that provided financial assistance to a member (section 65(1) of the SIS Act), they will each receive (and be expected to pay) a $10,200 penalty which they must all personally pay not using SMSF funds. This means the ATO will expect to collect $40,800 in total.
- For an SMSF with 4 directors of a corporate trustee that provided financial assistance to a member (section 65(1) of the SIS Act), the corporate trustee, via the directors, will have to pay $10,200 total.
If the trustee pays the penalty from the SMSF's funds, this would be considered a very serious offence and the minimum likely outcome would be the disqualification from operating an SMSF. Non-compliance might also be considered.
I have read that directors of corporate trustees will be held jointly and severally liable for breaches. Is this correct?
Using the earlier example, the directors will all receive a penalty notice listing the $10,200 but the total payable will be that amount. The directors are all liable for the total, in effect they can determine the breakdown of the $10,200 including only 1 director personally paying the total amount. The only requirement is the penalty not be paid from the SMSF's funds.
Does this mean that the ATO is favouring SMSFs with corporate trustees?
The ATO doesn't favour one structure over another however we will be shortly listing the considerations that SMSF members should consider, including the longer term costs and work required with the different structures. Members might want to consider personal penalty costs from the ATO after 1 July 2014.
Are there particular contraventions or breaches that the ATO is focussing on?
While the ATO will be interested in all of the sections covered by the new laws, the particular ones we are interested in include:
- Subsection 65(1) - financial assistance
- Subsection 67(1) - borrowing by the fund
- Subsection 84(1) - in-house assets
- Subsection 104(1) - changes to trustees/directors
Are there any other comments?
The ATO will be applying the new powers from 1 July 2014. The first penalty notice will probably be issued on 1 or 2 July 2014. I highly recommend that trustees rectify breaches by COB 30 June 2014.
More Cleardocs information on related topics
You can read earlier articles on a wide range of SMSF topics.
Order SMSF related document packages
- Set up an SMSF
- Update an SMSF deed
- Set up an SMSF pension
- Change your SMSF trustee
- Arrange SMSF borrowing documents
- SMSF set up + register corporate trustee
- SMSF Death Benefit Nomination — binding or non binding
- SMSF Death Benefit Agreement — binding and permanent
- Actuarial Certificate
- SMSF Minutes & Resolutions Package