Penalties for SMSF trustees: The speeding ticket rules
- New penalty provisions took effect on 1 July 2014
- The new rules are in addition to previous penalties
- Tax Office expected to be quicker to apply these simpler penalties
Historically the penalty regime for superannuation funds, including SMSFs, was brutal and complicated. The Australian Tax Office (ATO) could make a fund non-complying (resulting in a massive tax bill), apply to the court for financial penalties to be imposed on a trustee, disqualify a trustee or accept an enforceable undertaking from them (see Table 1 for more on non-complying funds).
For many trustees who have intentionally or otherwise flouted the regulations governing SMSFs, the penalties (and the processes followed) were disproportionate to the specific rules breached. So either the trustee got whacked with an excessive penalty or didn’t get penalised at all.
On 1 July 2014, this situation changed when new rules, colloquially known as the ‘speeding ticket legislation’, commenced. The speeding ticket regime gives the ATO three additional penalty options for penalising SMSF trustees: rectification directions, education directions and administrative penalties.
A rectification direction is issued to a trustee (or director of a corporate trustee) and requires them to take action to fix up a contravention of the superannuation rules (the SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs). or related regulations). For example, if a fund has borrowed money, the ATO might issue a rectification direction requiring it to be repaid.
Before issuing a rectification direction, the ATO is required to consider the scale of any financial detriment that might be suffered and the seriousness of the breach (including past compliance history). The idea here is to make the punishment fit the crime.
An education direction requires a trustee (or director) to undertake an approved course, provided by the ATO or other educational bodies. The courses are provided free of tuition fees.
Once completed, the person must provide the ATO with a signed declaration that they understand their duties as trustee of an SMSF.
In addition to the rectification and education directions, the ATO will have the power to impose an administrative penalty on trustees (or directors) who breach one of seventeen listed SIS ActThe Superannuation Industry (Supervision) Act 1993. It is the main piece of law governing the operation of superannuation funds (including SMSFs). rules (see Table 2).
Where the breach is of an obligation that applies to trustees generally (for instance, the requirement to prepare accounts), each trustee will be subject to the penalty. So if a fund has four individual trustees, they’ll be required to pay a combined total of $6,800 for failure to prepare accounts. A corporate trustee only counts as a single trustee no matter how many directors or fund members it has.
Directors (at the time) are jointly and severally liable for penalties imposed on a corporate trustee. So if you become a director of a trustee company, you can become personally liable for prior breaches.
Who bears the cost?
Neither trustees nor directors can be reimbursed by the SMSF for any education costs or administrative penalties they incur. But an SMSF is not prohibited from bearing the costs of a rectification direction.
However, if the trustees have breached their duties or failed to exercise reasonable care, they may not be permitted under trust law or the fund’s trust deed to seek reimbursement.
Rights of review
Trustees have the right to request that the ATO vary a rectification or education direction. The request must be made before the specified date for completion of the direction and the ATO has 28 days to consider the request.
If a trustee or director seeks cancellation of the direction, they need to take the matter to the Administrative Appeals Tribunal (AAT).
One point to keep in mind is the difference in the potential penalties applying to corporate and individual trustees (if there are more than one). In the example above, a total penalty of $6,800 could apply where a fund had four individual trustees. However, a corporate trustee with four directors would only be liable to a penalty of $1,700.
This is another point to add to the list of reasons why you’re better off with a corporate trustee (see Give your SMSF a corporate trustee).
Remember, the new ‘speeding ticket regime’ adds to the penalty options available to the ATO. It doesn’t replace the old, harsh penalties – the ATO remains free to impose them on wayward trustees – and it probably means it’s less likely to overlook contraventions.
Finally, while it will hopefully never affect you, harsher penalties (including up to five years imprisonment) have also been introduced for those promoting schemes providing early access to super accounts.
The light touch penalty regime isn’t an excuse to start making mistakes, but may help to match the punishment with the level of infringement. While it means you’re less likely to suffer a brutal penalty for a minor mistake, it also makes it less likely breaches will go unpunished - making it as important as ever to keep your SMSF’s house in order.
Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.
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