Effective 1 July 2014, the ATO will have new powers that will allow it to apply a wider spectrum of penalties against trustees of SMSFs who contravene superannuation law.
On 18 March 2014, the Tax and Superannuation Laws Amendment (2014 Measures No.1) Act 2014 received Royal Assent. The implementation of this will provide the ATO with new powers to more directly deal with contraventions. Originally tabled in 2012 under a different name, the reform was intended to implement some of the recommendations of the Cooper Review.
The original Bill lapsed in August 2013 due to the election. However, the Act has recently been passed and will introduce new penalty powers effective from 1 July 2014.
Broadly, the ATO will have three new powers available to it. These powers have been introduced to allow the ATO to more "effectively, flexibly and proportionately" address non-compliance issues with superannuation laws.
While the new powers apply to directors of corporate trustees in the same manner in which they apply to individual trustees, for simplicity, we will use the term "trustees" to cover both individual trustees and directors of corporate trustees.
Accordingly, trustees of SMSFs be warned! The ATO will now have many more powers to impose penalties and will not be afraid to use them.
Currently, the ATO has a limited capacity to deal with and address contraventions of superannuation law. Its powers include:
• making an SMSF non-complying;
• applying to a court for civil penalties to be imposed;
• applying to a court for criminal penalties for more serious contraventions of the law;
• accepting an enforceable undertaking in relation to a contravention; and
• disqualifying a trustee of an SMSF.
In its current form, the penalty regime does not allow the ATO to provide a proportional response to a contravention. Accordingly, the ATO recognises that many trustees of SMSFs avoid sanctions simply by rectifying the conduct as the remedy available is considered disproportionately high with respect to the non-compliance issue.
However, the new penalty powers include graduated penalties that will allow the ATO to provide a measured response to a contravention of superannuation law.
New penalty regime
Broadly, the ATO will have three additional new powers at its disposal. These new powers will be:
• rectification directions;
• education directions; and
• administrative penalties.
• A rectification direction will require the trustee of an SMSF to undertake a specific action to rectify a contravention. That action will need to be taken within a specific timeframe and, if not complied with, will attract a financial penalty (currently valued at $1,700). Upon compliance with the direction, the trustee of the SMSF must also provide evidence of their compliance to the ATO.
• In determining whether to issue a rectification direction, the ATO must first consider the financial detriment that might be suffered by the fund as a result of compliance with the direction, the nature and seriousness of the person’s contravention and any other relevant circumstances.
• Unlike other penalties, a rectification direction cannot be given where the ATO has already accepted an enforceable undertaking in relation to a particular contravention.
• An education direction will require the trustee of an SMSF to undertake a specific course of education within a specified timeframe. Again, if not completed within the specified timeframe a financial penalty will apply (again $1,700). The trustee of an SMSF cannot pay for, or reimburse, any costs associated with the course from the assets of the SMSF.
• Finally, upon completion of the course, the trustee of an SMSF must provide evidence of their compliance to the ATO, and, within 21 days of completing the course, must sign a new trustee declaration confirming they understand their duties as a trustee.
• Interestingly, the courses of education that the ATO can direct a trustee of an SMSF to attend must be those for which there are no fees charged.
• The final and the most significant addition to the ATO’s powers is the introduction of administrative penalties. This applies to specific contraventions and will result in the trustee of an SMSF being personally liable to pay a financial penalty ranging from $850 to $10,200. The amount of the penalty will depend on which provision of the Superannuation Industry (Supervision) Act ('SIS Act')1993 is contravened.
• Importantly, no costs of an administrative penalty can be paid for, or reimbursed from, the assets of the SMSF.
• An extract of the provisions that will attract an administrative penalty, and the amount of that penalty can be found in s.166(1) of the Act. However, there is an omission from that list. Interestingly, s.66 of the SIS Act — the prohibition on an acquisition from a related party — is not there and therefore, an administrative penalty cannot be issued with respect to this contravention.
• If proceedings are commenced by seeking a civil penalty, then any administrative penalty that has been paid must be refunded by the ATO.
Application of new regime
The new scheme of penalties empowers the ATO to issue different penalties at the same time. For example, the ATO could issue an education direction and administrative penalty in relation to a contravention of the prohibition on a borrowing under s.67 of the SIS Act.
• However, how this will be applied in practice remains to be seen. The explanatory memorandum to the Act suggests the ATO has sought a wider range of penalties that are not as severe as making an SMSF non-complying or disqualifying a trustee for some time now. Accordingly, it seems that these penalties may just be the ‘teeth’ that they were after.
Consider the following situation:
John and Anne are individual trustees of their SMSF. They withdraw funds from the SMSF’s bank account and deposit them into John’s personal bank account. They realise what they have done and journalise the withdrawal as the purchase of an unlisted share from John and unwind all the transactions.
Under the new penalty regime, the explanatory memorandum suggests that the ATO could issue the following penalties:
• if not unwound adequately, a rectification direction could be issued requiring specific rectification action;
• an education direction requiring John and Anne to attend; and
• an administrative penalty for the contravention of:
• s.65 of the SIS Act, providing a loan to a member (60 penalty units, ie, $10,200 for each trustee);
• s.66 of the SIS Act, acquisition from a related party (no administrative penalty, but there is the risk of other penalties including, theoretically, even prison);
• s.67 of the SIS Act, the prohibition on borrowing (60 penalty units, ie, $10,200 for each trustee); and
• s.84 of the SIS Act, more commonly referred to as the in-house asset rules (maximum penalty 60 penalty units, ie, $10,200 for each trustee).
Accordingly, from July 1, the ATO could unilaterally impose a fine of $61,200.
However, we note that depending on the seriousness of the contravention, the ATO still retains its power to make the SMSF non-complying.
The introduction of the Bill is set to widen the ATO’s powers, and trustees of SMSFs should take notice! Any contraventions of superannuation law will be met with one or more of the ATO’s new powers, with trustees set to be hit with harsher penalties expected to attack their own pockets.
By Krishna Skandakumar, lawyer, and Bryce Figot, director, DBA Lawyers.