SMSFs generally offer greater flexibility and control than other types of super funds. But with greater control and flexibility comes greater responsibility. In addition to making investment decisions, SMSF trustees are responsible for the administration of the fund and are ultimately responsible for ensuring the fund complies with superannuation rules.
If fund trustees breach any of those superannuation rules, the ATO has a number of penalties it can impose on fund trustees. These include:
- Administrative penalties
- Education directions
- Rectification directions
- Trustee disqualification
- Civil and criminal penalties, and
- Making a fund non-complying.
SMSF trustees must, therefore, take all aspects of running their fund extremely seriously. When in doubt about any aspect of your responsibilities as an SMSF trustee, seek professional advice from your accountant or financial adviser.
If you do breach the rules, you could be subjected to one or more of the following ATO penalties.
The ATO can impose administrative penalties up to a maximum specified penalty where a breach of the superannuation rules has been established.
This type of penalty is known as a strict liability penalty where no proof is needed to establish whether the trustee knew they were doing anything wrong. So pleading ignorance won’t help in this case. Depending on the seriousness of the breach, the ATO can use its discretion to impose any penalty up to the maximum.
Penalties must be paid from trustees’ personal savings and not from the fund.
Where a penalty is levied, it is applied per trustee. Therefore, if the ATO issues a $1,800 penalty for not keeping trustee minutes, individual trustees will each receive a fine of $1,800.
Where the SMSF is structured using a corporate trustee, however, only one fine would apply to the company. Penalties must be paid from personal savings of one or more of the directors as all directors are jointly and severally liable for fines.
Depending on the particular type of breach, maximum penalties can range from $900 up to $10,800 per trustee per offence.
For example, breaches of operating standards carry maximum penalties of $3,600 per trustee per offence.
At the upper end of the scale, breaching the in-house asset rules, lending rules or borrowing rules carries a maximum penalty of $10,800 per trustee per offence.
Where a breach of the superannuation rules occurs due to a lack of knowledge on the part of SMSF trustees, the ATO can give a written direction for the trustees to undertake an approved course within a specified period of time.
These online education courses aim to improve the competency of SMSF trustees, improve their ability to meet their regulatory obligations and reduce the risk of any further contraventions occurring. You can find a list of approved courses on the ATO website.
Once trustees have completed an approved course, they must provide the ATO with proof of completion.
The trustees must also complete a Trustee Declaration confirming that they understand their trustee obligations. Declarations must be retained in the fund records.
Any trustee who fails to comply with an education direction is liable for an administrative penalty of $900.
SMSF trustees who have breached the superannuation rules may be able to avoid fines or more serious sanctions by making undertakings which the ATO accepts as an appropriate response to the breach.
Such undertakings must be in writing and include:
- A commitment from trustees to modify their behaviour and implement strategies to prevent any further breaches
- Any actions needed to rectify the breach and return the fund to the position it was in prior to the breach, and
- A timeframe for those actions to be undertaken and reported to the ATO.
In determining whether they will accept the undertaking, the ATO will consider:
- The compliance history of the fund trustees
- The nature of the breach and whether it can be rectified, and
- Whether the breach resulted in any criminal consequences.
If trustees fail to comply with an undertaking, more serious consequences are likely.
The ATO can escalate the treatment of a breach by issuing a rectification direction. Failure to comply with such a direction can lead to fund trustees being personally fined, disqualified to act as trustees, or, in the most serious cases, the fund being made non-complying.
Rectification directions are designed to ensure that managerial and administrative arrangements are put in place at fund level to ensure no similar breach occurs in the future.
When deciding whether a rectification direction is appropriate, the ATO will consider:
- The nature and seriousness of the breach
- Any financial detriment the fund is reasonably likely to suffer as a result of complying with the direction, and
- Any other relevant circumstances.
The ATO will generally allow six months for trustees to rectify an issue. For failing to comply with a rectification direction within the specified period, trustees are liable for a penalty of $1,800.
SMSF trustee disqualification
The ATO can disqualify any particular individual trustee or director of a corporate trustee, if the ATO considers their actions raise concerns about their appropriateness to act in that capacity.
When deciding whether to disqualify a trustee, the ATO may consider:
- The seriousness of the breaches
- How many breaches have occurred, and
- The likelihood that they will continue to be non-compliant.
In addition to considering any breaches, the trustee’s personal character may also be considered with the ATO determining whether the trustee is “a fit and proper person” to act as trustee.
Upon receiving a disqualification notice, the trustee must immediately remove themselves as a trustee of the fund. Continuing to act as a trustee once a notice has been received can result in a maximum penalty of two years’ imprisonment.
Following any disqualification of a trustee or director, the SMSF will then have six months to address the fund’s trustee structure and membership.
The disqualified trustee/director will have to roll over their fund balance to another superannuation fund within six months as they will no longer be eligible to be an SMSF member.
Civil and criminal penalties
The ATO may apply through the courts for civil or criminal penalties to be imposed.
This may occur where SMSF trustees have contravened provisions concerning:
- The sole purpose test
- Lending to members
- Borrowing rules
- In-house asset rules
- Duty to notify the regulator of significant adverse events
- Arm’s length rules for an investment.
Before instigating civil or criminal prosecution action, the ATO will consider the severity of the contravention, the circumstances that led to the contravention and the trustees’ actions.
Making a fund non-complying
Serious contraventions of the superannuation rules may result in an SMSF being issued with a notice of non-compliance. Where this occurs, the fund will remain non-compliant until such time as it receives a notice of compliance.
Making a fund non-complying can have a significant financial impact on the SMSF because:
For every year the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate, and
In the year the fund becomes non-complying, it includes in its assessable income an amount equal to the market value of the fund’s total assets less any contributions the fund has received that are not part of the taxable income of the fund.
Contact Westlawn Business Services
If you have any questions about the superannuation rules governing self managed super funds, or if you are concerned about any possible breaches in your fund, contact your Westlawn Business Services Accountant.
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