In the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) released on 13 December 2023, the government confirmed it will increase the amount of the Commonwealth penalty unit by 5.4 per cent from $313 to $330, commencing four weeks after passage of legislation.
The increase will apply to offences committed after the relevant legislative amendment comes into force.
The government had previously increased the amount of the penalty unit from $275 to $313 on 1 July 2023.
As a result of this latest increase, DBA Lawyers issued a note cautioning SMSFs to be “extremely careful” as this change will result in most administrative penalties increasing from $16,500 (i.e. 60 penalty units x $275) to $19,800 (i.e. 60 penalty units x $330).
Penalty units can be applied by the ATO under s 166 of SISA, for many reasons including:
- s 65(1): lending to members or relatives (with exceptions): 60 penalty units
- s 67(1): borrowing (with exceptions): 60 penalty units
- s 84(1): failing to comply with in-house asset rules: 60 penalty units
- s 103(1): failing to keep minutes: 10 penalty units
- s 104(1): failing to keep records of changes of trustee: 10 penalty units
“It is interesting to note that the penalty unit has increased by 83 per cent since 30 June 2017,” DBA Lawyers said.
In light of the considerable uptick in penalties, the firm said that the notable contrast in the application of administrative penalties between corporate and individual trustees establishes a persuasive case for every SMSF to consider embracing a corporate trustee structure.
“It is definitely a good time to move away from individual trustees and move to a corporate trustee,” DBA Lawyers said.
Although numerous trustees delay transitioning to the corporate trustee model under the assumption that they won’t violate the law, DBA Lawyers cautioned that this perception carries inherent risks.
“It is our experience that even trustees that consider their fund management to be diligent and honest can face hefty penalties due to contraventions linked to human error,” the firm said.
“As the saying goes, to err is to be human and a common example of human error resulting in unsuspecting trustees facing penalties is the making of an unauthorised withdrawal or a failure to immediately reimburse the member for an expense paid on behalf of a fund.”
In addition to the increased severity of a contravention, DBA Lawyers explained that trustees now also face an increased probability of being caught with the ATO upping its pressure on SMSF auditors.
Moreover, DBA Lawyers noted that given that advisers may be implicated in contraventions, especially if they give incorrect advice, they should be proactive in assisting clients to move to a corporate trustee.
“Advisers can inform clients of the increased risks and the substantial increase in penalties for individual trustees and the fact that mistakes may arise along the way.
“An adviser who has not been proactive in recommending a corporate trustee may be asked to pay the additional penalty if the adviser has not brought the different treatment to the client’s attention”.
