Key points
- ATO has a broad range of new powers.
- It can direct you to undertake an education course at your own expense.
- It also has much greater powers now to impose fines for a range of breaches.
The new penalty powers that have been given to the Australian Taxation Office have many wondering what processes the regulator will follow when regulating SMSFs.
Fortunately, the ATO has recently released some information that provides a helpful guide as to how they will use these new powers.
Here is a list of the ATO’s powers and a brief description of how and when they might be used.
- Trustee education – when the ATO identifies a problem with your fund, they may write to you and demand that, at your personal expense, you undertake an education course within a specific timeframe. The course would hopefully help you understand your SMSF trustee obligations and reduce the risk of you making further mistakes. Once you’ve finished the course you need to show the ATO, in writing, that’s it has been completed. If you ignore the ATO’s demand then you can be fined $850.
- Direction to fix problems – the ATO might demand that you fix some super law breaches. This demand will be issued in writing and will give you a specific time limit when the job needs to be completed by. Before issuing these directions, the Tax Office must consider the costs of fixing the problems up and any other relevant matter. Further penalties will apply if you fail to follow these directions.
- Enforceable Undertaking – these are similar to the above, where the ATO demand that you fix some specific problems with your SMSF, but is initiated by an SMSF trustee. Typically the undertaking will say that you agree to fix up specific problems with your fund by a certain date. Before accepting this type of undertaking, the ATO will consider a few issues, including the super law compliance history of your fund. If the ATO accepts your proposal and you then don’t satisfy all of its terms, then it is obviously not going to be too impressed and you can expect further action to be taken against you.
- Administrative penalties – these are monetary fines for breaching various sections of the super laws. The fines vary depending on the specific super law that is breached. For example, not complying with all the rules about borrowing money will see a fine of $10,200 applied, but if you fail to keep relevant minutes of your trustee decisions then a fine of $1,700 will apply. These fees are paid by each trustee out of their own resources. This means a corporate trustee only pays a fine once but individual trustees will each be liable for these fines. The ATO can reduce or absolve you from paying these fines and you can object if you’re not happy with their decisions.
- Allowing a SMSF to be wound up – this may not technically be a penalty, however you can escape other penalties listed here if you elect to wind your fund up and transfer your account balance across to an APRA regulated fund. However, winding up a fund is not a guaranteed way of escaping some or all of the penalties mentioned here.
- Notice of non-compliance – very serious breaches of the super laws will see your fund be declared a non-complying super fund. In the first financial year this occurs your fund will face a tax rate of 45% (47% while the Temporary Budget Repair Levy is in place) and this tax rate applies to the market value of your fund’s assets, less non-concessional contributions. This tax rate then applies to the taxable earnings of your fund for each subsequent financial year that it remains a non-complying fund. Declaring an SMSF non-complying is a very serious step and the ATO has established procedures that it uses to determine when a fund should be declared non-complying. Fortunately this rule is used sparingly.
- Disqualifying an SMSF trustee – under the super laws the ATO can disqualify you from being a SMSF trustee. If your fund has a corporate trustee then that corporation and yourself may be disqualified. This will typically occur when you’ve breached the super laws and the ATO believes you’ll probably continue to infringe these laws. Once you’re debarred from being a trustee then you must resign this position as soon as possible.
- Civil and criminal penalties – prior to the introduction of the SMSF administrative penalties mentioned above, the ATO’s only way of imposing monetary fines (other than non-compliance) was to ask the Court to impose a civil or criminal penalty. These provisions have been used rarely but are still available to the ATO for various super law breaches.
- Freezing an SMSF’s assets – if the ATO believes your actions are likely to significantly adversely affect the interests of your SMSF’s beneficiaries then it can issue a notice freezing the assets of the fund. The notice may prevent you from acquiring, disposing or dealing with any assets. Again this power is rarely used.
Need to know
More than one power can be used for the same breach – for example, if you’ve been particularly naughty, the ATO might enter into an enforceable undertaking with you and once you have complied with this, they might also ban you and declare your fund non-complying as well as seek monetary penalties from the Courts.
These rules have nothing to do with tax issues. If your fund breaches the tax laws then there is a list of penalties that can apply in these situations.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.