The ATO's additional powers to deal with breaches of the Superannuation Industry (Supervision) Act 1993 (SIS Act) by self-managed superannuation funds (SMSFs) is now law and will apply to breaches of the SIS Act from 1 July 2014.
The new penalties will significantly increase the ATO's ability to deal with non-compliance with options less extreme than making the fund non-complying. From 1 July 2014, the ATO has the power to:
- issue a 'rectification direction';
- issue an 'education direction'; and
- impose an administrative penalty of up to $10,200 for each breach personally payable by the offending trustee or director.
SMSF trustees will now be liable for administrative penalties for breaches of specific sections of the SIS Act. These penalties, ranging from $850 to $10,200, will be automatically imposed once a breach has been established. For example:
- breach of 67(1) – prohibition against borrowing – $10,200
- breach of 84(1) – in-house asset rules – $10,200
- breach of 35B – obligation to keep records and accounts – $1,700
Click here to see all provisions that attract monetary penalties.
There has been one critical omission, however, from the admin penalty provisions. A breach of the prohibition on acquiring assets from related parties in section 66 of the SIS Act will not result in an administrative penalty. This appears to have been overlooked when the legislation was reintroduced to parliament following the election.
The penalties are imposed on the trustee or the directors of a trustee company. This means the penalties are imposed on individual trustees, and where a company is the trustee either that company or the directors.
Where the administrative penalty is payable by the corporate trustee, each director of the company is jointly and severally liable for the penalty.
It is not clear how the penalties apply where the trustee is a company, as the legislation imposes the penalties on the company 'or' the directors. In some cases there may be lesser penalties imposed where the trustee is a company as opposed to individuals, but this will not necessarily always be the case and depends on how the ATO administers the legislation.
The ATO has the power to remit.
Any administrative penalty must not be paid or reimbursed out of the SMSF assets.
The administrative penalty powers are in addition to the other avenues available to the ATO. However, an administrative penalty cannot be imposed and must be refunded if proceedings are commenced for a civil penalty.
The ATO will also have the power to issue a rectification direction to a trustee or director who has contravened the SIS Act. This is effectively the equivalent of an 'enforceable undertaking' in reverse.
The rectification direction can require the offender to take a specific action to rectify the contravention within a specific timeframe, with the costs of the action borne by the offender (not the SMSF).
In deciding to issue such a direction, the ATO must consider the financial detriment of complying with it, the seriousness of the breach and 'any other relevant circumstances'. This means rectification directions with significant transaction costs, for example, may be open to challenge.
If the offender fails to provide evidence to the ATO of compliance, they are liable to a fine of $1,700 for each breach.
The ATO can use this option in conjunction with another punishment, except where the ATO has already accepted an enforceable undertaking in relation to the particular contravention.
The ATO will also be able to issue an education direction to a trustee or director who has contravened a provision of the SIS Act.
An education direction requires the trustee or director to complete an approved education course within a specified period of time. Evidence must be provided that the course was completed and the individual must re-sign a trustee declaration form confirming they understand their duties as an SMSF trustee.
A person to whom an education direction is given must comply with the direction before the specified period or they will be liable for an administrative penalty or can be fined $1,700.
All expenses incurred (for example, travel expenses) in completing the course must be paid for personally – they cannot be reimbursed by the SMSF.
Challenging the ATO
A person issued with a rectification or education direction can request that the ATO vary the direction or object to the decision in accordance with the Taxation Administration Act 1953 (Cth). It will also be possible to request that any admin penalty be remitted by the ATO. However, it is highly likely that the ATO will take a strict approach when dealing with such requests.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.