The new era of SMSF penalties
We’ve entered a new era of SMSF administrative penalties where trustees are facing the consequences of any illegal activity in their funds. The anecdotal evidence suggests that SMSF penalties are being applied hard and fast by the ATO, and not just for a single contravention of SIS.
When SMSF administrative penalties were first introduced on 1 July 2014, the ATO adopted a softly-softly approach. The preferred model was to educate, support and assist SMSF trustees in finding a resolution without having to enforce the full administrative penalties.
In direct contrast is the current situation where SMSF trustees are now on the receiving end of multiple penalties each time they contravene a provision in s 166 SIS.
At first glance, this may appear to be reasonable and in line with the punishment meted out to a criminal in a court of law, but it quickly becomes apparent how multiple penalties will drive the behaviour of trustees towards greater non-compliance.
Illegal early access
One of the most common examples can be seen in illegal early access, which represents 21 per cent of all contraventions and comes with an administrative penalty of 60 penalty units (or $12,600 at $210 per penalty unit).
Consider the SMSF trustee who takes out a lump sum of $100,000 from their fund without meeting a condition of release or their preservation age. Under these circumstances, each individual trustee will be fined $12,600 versus a corporate trustee a total of $12,600.
That’s a striking difference to an SMSF trustee taking out five (5) lump sums amounting to $50,000 and receiving five penalties totalling $63,000 for each trustee. Remember, too, that the fund cannot pay for these fines and they must be paid by each trustee personally.
A penalty scheme of this nature will fuel the practice of SMSF trustees accessing more significant amounts from their SMSFs than otherwise required to avoid the imposition of multiple penalties.
Unintended SMSF consequences
One of the unintended SMSF consequences of this new regime will be the unlikely recoverability of larger cash assets, which will have a negative impact on the overall retirement savings of Australians.
Applying a penalty scheme that promotes a reduced penalty for removing a large amount of money from a fund in one instance, as opposed to receiving multiple penalties for several potentially smaller withdrawals, will also feed directly into the hands of promoters of illegal early access schemes.
SMSF trustees who also engage in “pub talk” will quickly become aware of this new penalty regime which may bring about a different contravention dynamic not previously seen.
SMSF advisers would also feel obliged to let their clients know that by withdrawing a larger lump sum as opposed to several smaller withdrawals, they will avoid multiple administrative penalties.
SMSF auditor expectations
Another consideration is that s 166 SIS does not state that the penalties apply each time a contravention is breached, but “if a person contravenes a provision as outlined in s 166, then they are liable for the corresponding administrative penalty”.
Accordingly, s 166 fails to mention that the penalty explicitly applies each time the provision is contravened.
In line with this approach, will SMSF auditors now be expected to record each breach of the SIS provision/s in an ACR to assist the ATO in the application of these new penalty guidelines?
Extending the reporting requirements for SMSF auditors will be onerous and increase the amount of work already being undertaken in line with their professional obligations to ensure regulatory compliance.
There’s no doubt that SMSF trustees who are doing the wrong thing should bear the full brunt of the SIS law. But imposing multiple penalties that are out of reach of mum and dad SMSF trustees may be the financial turning point for them and their families.
The SMSF industry is waiting on clarification from the ATO on their approach to administering the penalty regime through a Law Administration Practice Statement.
The starting point should be to ensure that the application of SMSF administrative penalties does not cause unintended or unjust results to SMSF trustees in their personal capacity.
Shelley Banton, executive general manager, technical services, ASF Audits