Introduced as part of a package of SMSF reforms, the new penalties are designed to improve the operation, efficiency and integrity of the SMSF sector.
It would be wrong to assume these penalties were introduced in response to a poor compliance culture in the SMSF sector. To the contrary, only around 2 per cent of SMSFs are reported as contravening the rules each year. In fact, in the year ended 30 June 2013, Australian Taxation Office (ATO) statistics show there was a 10 per cent decrease in the number of SMSFs with reported breaches and an 11 per cent decrease in the overall number of contraventions reported.
So why the need for new penalties? Simply put, the previous penalty was inadequate and often did little to discourage SMSF trustees from breaching the rules. Applying penalties under the previous regime was often costly and time-consuming for the ATO and the potential consequences disproportionately high. As a result, the ATO rarely used their penalty powers except in cases of significant non-compliance with the law.
What are the new penalties and how will they apply in practice?
The new penalties will provide the ATO with additional penalty options which are both educational and punitive. The penalties will work in conjunction with the previous penalties and give the ATO new powers to impose a rectification direction or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened a provision of the Superannuation Industry (Supervision) Act 1993 (the SIS Act) or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).
A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the ATO with evidence of the person’s compliance with the direction. Similarly an education direction will require a person to undertake a specified course of education within a specified time frame and provide the ATO with evidence of their completion of the course.
The ATO now also has the power to impose an administration penalty if certain provisions of the SIS Act are contravened. The administration penalties work on a sliding scale, with the amount of the penalty reflecting the nature and seriousness of the breach. Administrative penalties range from $850 for failing to comply with an education direction and failing to provide statistically information, to $10,200 for breaching the SIS investment rules. An administration penalty must not be paid or reimbursed from the assets of the fund.
Importantly an administration penalty is not a discretionary penalty – meaning the ATO has no option but to impose a penalty if after auditing the fund the ATO finds a breach of an administration penalty provision. However, the ATO does have the power to remit all or part of the administration penalty, which means if the trustees are notified of their liability to pay an administrative penalty, they will need to negotiate the partial or full remit of the penalty with the ATO based on their circumstances.
The new penalties will provide the ATO with a flexible and cost-effective mechanism for imposing sanctions that more appropriately reflect the nature and seriousness of the breach, and will support the ongoing integrity of the SMSF sector.