Why PS LA 2020/3 covers all SIS breaches

It would appear at first glance that s166 SIS doesn’t cover all the reportable breaches of SIS and applies to specific provisions only. 

While this is technically true, it’s a trick for young players because, like everything to do with SMSFs, the devil is in the detail.

Reportable breaches covered by s166 SIS

Let’s break it down. 

There are 29 reportable breaches of SIS that SMSF auditors are obliged to review to ensure regulatory compliance for every fund. 

The reality is that s166 SIS contains only eight reportable breaches of SIS to which an administrative penalty will apply. 

Does this mean that only 27 per cent of all reportable breaches are covered?

Reportable breaches listed in s166 SIS

The provisions of SIS listed in s166 SIS that SMSF auditors have to report mandatorily include: 

1. s35B – trustees must prepare, sign and retain accounts and statements
2. s65 – trustees must not loan monies or provide financial assistance to any member or relative at any time during the financial year
3. s67 – trustees must not borrow money
4. s84(1) – trustees must take all reasonable steps to ensure that the in-house asset rules are complied with
5. s103 – trustees must keep minutes of all meetings and retain the minutes for a minimum of 10 years
6. s104 – trustees must keep up-to-date records of all trustee or director of corporate trustee changes and trustee consents for a minimum of 10 years
7. s104A – trustees who became a trustee on or after 1 July 2007 must sign and retain a trustee declaration
8. s105 – trustees must ensure that copies of all member or beneficiary reports are kept for a minimum of 10 years

The list is heavily skewed towards breaches of minutes and records with only three high-risk contraventions included: s65, s67 and s84.

While all three of these breaches will result in SMSF trustees personally incurring penalties worth a whopping 60 penalty units each, or $13,320 per trustee, all the rest are worth 10 penalty units each or $2,200 (which is still nothing to sneeze at!).

But what about contraventions of separation of assets (r4.09A), illegal early access (r6.17), sole purpose test (s62), investments at arm’s-length (s109), investment strategy (r4.09) and market value (r8.02B)?

Has the regulator finally given SMSF trustees a get-out-of-jail-free card?

The s166 SIS catch-22

Using the above approach is both limited and technically incorrect.

Section 31 SIS sets out the prescribed operating standards applicable to the operation of SMSFs and under which trustees must comply. 

It contains standards that include, but are not limited to, the following matters:

1. trustee behaviour
2. number of trustees
3. contributions
4. preservation of benefits
5. retirement income streams
6. investment and management of assets
7. solvency
8. winding-up

Each of these operating standards broadly covers the missing 21 reportable breaches in one way or another. 

Section 34 SIS (listed in s166 SIS and worth 20 penalty units) then says that the prescribed operating standards must be complied with at all times and s166 SISA imposes an administrative penalty for breaching those standards.

As a result, any reportable breach of SIS not explicitly covered in s166 SIS gets caught by the operating standards under s34 SIS at a $4,400 cost to each trustee. 

ACR reporting

Trying to circumvent the reporting of provisions of SIS listed in s166 is also fraught with disaster. 

By way of example, problems can arise where a fund acquires an asset from a member for an amount greater than the asset’s market value.

Under these circumstances, the trustees have contravened multiple provisions of SIS which include s65, s52, r4.09, s62 and s66. While s65 is the only breach listed in s166 SIS which gives rise to a penalty, the auditor may choose to report it as an s66 breach instead. 

Regardless of how the breach gets reported, it will be the ATO’s investigation into the activities of the fund and trustee behaviour that will decide the final application of penalties and whether they will be wholly, partially or not remitted. 

It would be misguided to believe that the ATO would be unable to identify the primary contraventions and impose the appropriate penalties.  

Remember, too, that any ATO penalty remission decisions are looked at on a case-by-case basis for each trustee incurring a penalty.

Conclusion

The ATO has come full circle since the introduction of administrative penalties in 2014. The reason is that the educational approach they previously adopted did not make any in-roads into changing trustee behaviour. 

The SMSF industry has been on notice for some time that the full impact of administrative penalties would hit poorly behaving trustees. 

The result is that the recently released PS LA is an all-encompassing document that covers all reportable SIS breaches for administrative penalties. There is no get-out-of-jail-free card available regardless of whether s166 SIS lists a contravention or not.

Shelley Banton, head of education, ASF Audits