Draft legislation designed to give the ATO more flexibility in dealing with breaches of the Superannuation Industry (Supervision) Act or Regulations by SMSF trustees has been released. The changes are intended to take effect from 1 July 2013.

The proposed new penalties will significantly extend the ATO’s ability to deal with non-compliance and will apply to existing breaches that continue after 30 June 2013.

In the case of non-compliance, the proposals allow the ATO to:

  • issue a ‘rectification direction’
  • issue an ‘education direction’
  • impose an administrative penalty of up to $10,200 for each breach personally payable by the offending trustee or director.

The new powers will be additional to the ATO’s existing enforcement powers and only apply to SMSFs, including those superannuation funds that would have been a SMSF but failed to meet the requirements of section 17A of the SIS Act.

Rectification directions

The ATO can issue a rectification direction requiring the offending trustee or director to take specific action to rectify the contravention within a specific timeframe, including putting in place arrangements to prevent further contraventions of a similar kind.

When issuing a rectification direction, the ATO must consider the financial detriment from 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.

The costs of complying with a rectification direction must be paid for by the person to whom the notice was issued – they cannot be refunded by the SMSF.

If a trustee or director does not comply with a rectification direction and 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.

Education directions

The ATO can issue an education direction requiring a person to successfully complete an ATO approved education course within a specified time.

This option can be used in conjunction with a rectification direction, an enforceable undertaking, a civil penalty or an administrative penalty.

If a trustee or director does not complete the education course and notify the ATO, they are liable to a fine of $1,700 and an administrative penalty of $850.

Once an education course has been completed, the individual must re-sign a trustee declaration form confirming they understand their duties as a SMSF trustee. A failure to do so makes them liable for an administrative penalty of $1,000.

Any expenses incurred (for example, travel expenses) in completing the course must be paid for personally – they cannot be reimbursed by the SMSF.

Administrative Penalty

If an individual trustee, corporate trustee or director of a corporate trustee breaches specific sections of SIS Act, they will be liable to a mandatory administrative penalty ranging from $850 to $10,200. For example:

  • a 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 affected provisions and monetary penalties.

The penalties are mandatory – the Commissioner has no discretion, although you can apply for the penalty to be remitted. The penalty cannot be reimbursed out of the SMSF assets.

It is possible that the administrative penalty can be imposed more than once. For example:

  • Where there are multiple individual trustees or directors of a corporate trustee, they can each be liable to a separate administrative penalty for the one breach.
  • If a contravention breaches more than one administrative penalty provision, multiple penalties can be imposed as the penalties are imposed on the contravention of specific sections, rather than the act as a whole.
  • In cases where the breach is a continuing breach (for example, exceeding the in-house asset rules over multiple years) a penalty will apply each year whilst the breach is continuing.

Where the administrative penalty is payable by the corporate trustee, each director will be jointly and severally liable for the penalty.

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. 

Challenging the ATO

A person issued with an education direction or rectification direction can request the ATO vary the direction or object in accordance with the current procedures. A person issued with an administrative penalty can object to it.