The Government's Stronger Super SMSF Working Group has released three new SMSF-related Issues Papers, as part of consulting with industry on proposed reforms. The Issues Papers discuss recommendations made in the Cooper Super System Review regarding amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act), trustee penalties and illegal early release of superannuation benefits.
Stronger Super Reforms — what are they?
Stronger Super Reforms are the Government's response to the Cooper Super System Review. The reforms aim to achieve efficiencies in the Australian superannuation industry — the ultimate objective being to improve the retirement benefits of all superannuation members.
For a detailed overview of the Stronger Super Reforms and how they affect SMSFs, see our previous ClearLaw article "Stronger Super — setting a path for future reform of the Australian Superannuation Industry".
Issues Paper 1 — Amendments to the Superannuation Industry (Supervision) Act 1993
The Cooper Super System Review recommended the following amendments be made to the SIS Act to address problems that currently exist under the SIS Act:
- Asset Valuations
Amend the SIS Act to require SMSFs to value their assets at a net market value (as defined in the Australian Accounting Standard 25 — Financial Reporting by Superannuation Plans).
Publish a set of valuation guidelines, in consultation with industry.
- Improve Administrative Efficiency
Remove provisions which create unnecessary administrative burdens for SMSF trustees. The idea here is to align SMSFs with the rules applying to small and single member proprietary companies, for which meetings, minutes and other formalities have been reduced to a minimum.
- SMSF Deeds
Amend provisions to automatically deem anything permitted by the SIS Act or a tax act to be permitted by an SMSF's trust deed. This would reduce the need for SMSFs to update their trust deeds every time there are changes in the law.
- Separation of Assets
Require the separation of SMSF assets from personal, or employer, assets. These requirements will be in a SIS Act operating standard which will give the ATO the power to enforce the separation of assets for SMSFs.
- Insurance and Investment Strategy
Amend the investment strategy operating standard so that SMSF trustees are required to consider life insurance, and total and permanent disability insurance, for SMSF members as part of their investment strategy.
The Government, supports these recommendations and has posed a number of questions relating to each SIS Act amendment for the purposes of consultation. Please see the Issues Paper for further information.
Maddocks says, that although the reforms will result in greater administrative efficiency for SMSF trustees and should be encouraged, the advantages are reduced by:
- additional regulation on asset values; and
- the conditions on which certain types of transactions with related parties can proceed.
Issues Paper 2 — Trustee penalties
The current penalty regime for SMSF trustees who disregard the rules is supposedly not flexible enough to allow the ATO to 'achieve optimal regulation'. Therefore, the Cooper Super System Review has recommended that the ATO have the following new powers to penalise SMSF trustees who breach the SIS Act:
- the power to issue administrative penalties against SMSF trustees on a sliding scale reflecting the seriousness of the breach;
- the power to issue relevant persons with a direction to rectify specified contraventions within a specified reasonable time; and
- the power to enforce mandatory education for SMSF trustees who have breached the SIS Act.
The Government supports these recommendations and made the following comments for each new ATO power:
- Administrative penalties
- The Cooper System Review suggested the penalty framework could be modelled on either the Tax Administration Act 1953 (TA Act) penalty framework or the 'speeding ticket' concept under the Financial Sector (Collection of Data) Act 2001.
- The TA Act penalty framework includes applying penalty units, approach to remission, assessment, objection, amendment and review processes.
- The TA Act model is the preferred option, as this model is likely to result in less litigation and will provider greater flexibility to assign penalty amounts according to the seriousness of the contravention.
- Under the TA Act model the preferred penalty regime would:
- provide for base penalty amounts referenced to penalty units;
- provide for statutory increases and decreases in the base penalty amount for aggravating and mitigating factors;
- allow the Commissioner to remit all or part of a penalty;
- allow penalties to be assessed through an active compliance examination of the contravention in which all compliance treatments would be considered; and
- enable trustees to object to the imposition of an administrative penalty and decisions not to remit the penalty.
- Direction to rectify
- Currently, the ATO has the power to accept an enforceable undertaking. However, such undertakings rely on SMSF trustees initiating the undertaking with the ATO.
- The current enforceable undertaking arrangements are inefficient. Providing the ATO with the power to direct SMSF trustees to rectify a contravention will improve the efficiency and timeliness of rectification.
- The time given to rectify a contravention will depend on the circumstances.
- A direction to rectify can be used concurrently with existing and proposed compliance treatments (e.g. mandatory education and administrative penalties) and will not prevent an SMSF trustee from offering the ATO a written undertaking under the current legislation.
- Mandatory SMSF trustee education
- Mandatory education would be provided by a body approved by the regulator and would be at the cost of the SMSF trustees personally (not the SMSF).
- Mandatory education would be imposed if an SMSF trustee's lack of knowledge and/or understanding has led to a contravention occurring.
- SMSF trustees would be expected to complete a universal course that covers all aspects of running an SMSF or complete a course on a specific topic relevant to the contravention that has occurred.
- SMSF trustees will be expected to complete an assessment in order to complete the course.
- Such courses could either by developed and delivered by Registered Training Organisations or through accredited training courses, that the ATO had reviewed.
Maddocks says that increased regulatory flexibility for the ATO is to be encouraged, but only alongside:
- meaningful reform of penalties for excess contributions (further to the May 2011 Budget announcements);
- meaningful reform of the punitive non-residency rules for SMSF's; and
- a meaningful definition of the ATO's regulatory role — to aid the ATO's development of consistent regulatory policy in the areas of super, tax and consumer protection.
Issues Paper 3 — Illegal early release of superannuation benefits
The Cooper Super System Review identified a major issue with illegal accessing of superannuation benefits before a specific event occurs, such as, retirement, severe financial hardship or for compassionate reasons. The Review recommended that:
- 'stronger sanctions' be in place for people who promote schemes for early access of superannuation benefits; and
- greater penalties for individuals who gain early access to their superannuation benefits illegally.
The Government supports these recommendations and makes the following comments:
- Scheme promoters
- Legislation should be passed that allows the ATO to enforce criminal and civil penalties to discourage promoters of illegal early release schemes.
- New penalties for scheme promoters should be drafted into the SIS Act, based on two possible models:
- Model 1 amends section 307 of the SIS Act, making it an offence to use an approved form (or to encourage others to use an approved form) with the intention of contravening a regulatory provision or aiding another person to contravene a regulatory provision.
- Model 2 introduces a new penalty regime under the SIS Act which would be modelled on existing promoter penalty laws — however, it would be restricted to superannuation issues.
- Individuals who illegally access their superannuation benefits
- Existing tax laws should be amended to allow amounts accessed illegally to be taxed at the superannuation non-complying rate (45%) and an additional penalty, based on the sliding scale of penalties that takes into account individual circumstances.
- Additional penalties can be in the form of a shortfall penalty. The amount of the shortfall penalty would depend on the individual's behaviour that resulted in the shortfall amount and the penalty may be remitted where appropriate.
Maddocks says, the recommendations make sense provided they are coupled with sensible regulatory policy.
The SMSF Working Group welcomes comments on the above Issues Papers. All comments are due by 31 May 2011 and will be available to the public on the Treasury website (unless requested to be kept confidential).
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks General Commercial Team.
More Cleardocs information on SMSFs
You can read other articles concerning superannuation and SMSFs here.
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