From 1 July this year, the Australian Taxation Office has new powers to fine and punish SMSF trustees when they breach certain provisions of the legislation.

The financial penalties

There are 17 possible breaches that will incur financial penalties from $850 up to $10,200, depending on the breach. The new system has been in the pipeline for a while, but legislation passed in March has made it official. It will operate as a penalty unit approach, under which each penalty unit will carry a fine of $170.

The new penalties start at five penalty units, or $850, for something like not providing appropriate statistical information to the ATO. That penalty rate would then double for not preparing financial accounts and statements or keeping appropriate records of meetings and important decisions.

The most serious penalty would be for 60 units, or $10,200. Lending money to a member or relative would carry a penalty of 60 units.

The ATO will now find it much easier to issue monetary penalties. It was previously able to do this but it needed court action to enforce it.

Back to school

The ATO will also now have the power to issue educational directives where it feels mistakes have been made inadvertently or because trustees did not understand the rules.

This will be a free online course and will cover all aspects of SMSF management and administration, not just the area that was breached, and trustees will have to provide proof they have passed the course.

Head of policy and technical at AMP SMSF, Peter Burgess, believes this will be one of the most frequent punishments handed out by the ATO.

Need to know

The ATO will be able to use their new powers for breaches made from 1 July this year. But the ATO has also made it very clear in industry briefings, according to Burgess, that if the breach was made in a previous year and an effort has not been made to rectify prior to 1 July 2014, it will still be subject to the new penalties.

“This is where the tough love comes in. Get your fund in order now,” Burgess warned on Switzer TV.

And there is a double whammy for SMSFs with the individual trustee structure, as the monetary penalties will be imposed on each trustee and the fines cannot be paid from the fund. The total cost to a four-member fund with a five-penalty point breach, would therefore be $3,400, or $850 times four. An SMSF under a corporate trustee structure would only have the fine of $850 imposed on the company.

There are also a couple of extra compliance requirements at the end of this financial year that trustees need to be aware of to keep their fund on the right side of the rules.

This is the first year that trustees will need to have their annual audit completed by a registered auditor with ASIC. You can check whether or not your auditor is registered on the ASIC database here.

And there have been some changes to insurance requirements during the last financial year when it comes to trauma and total and permanent disability (TPD) insurance.

Previously, SMSFs were allowed to have policies that included own-occupation definitions i.e. they could insure for trauma for no longer being able to conduct their own job. A surgeon with a hand injury would be covered under this definition, as she would no longer be able to operate. However, these policies must now include an any-occupation definition. So if you are still fit for any kind of employment – our surgeon might be able to do medical research for example – the policy won’t pay out.

However this change will be grandfathered, so if you are thinking of taking out such a policy, then you need to do it before 1 July this year.

Most people in the industry are welcoming the changes to the ATO penalties as a more flexible approach for trustees who, most of the time, make mistakes inadvertently. But it would be very wise for SMSFs to start getting their funds in order now.

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.

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