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Examining PS LA 2020/3 and the ATO’s views on penalties

Bryce Figot & Daniel Butler
29 October 2020 — 6 minute read

How the administrative penalty system applies to SMSFs following the release of Law Administration Practice Statement PS LA 2020/3.

Introduction

The ATO recently published Law Administration Practice Statement PS LA 2020/3 to guide ATO staff on how to apply administrative penalties. This provides the methodology on how ATO case officers make determinations on imposing and remitting penalties for contraventions under s 166 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).

The ATO’s view is that a contravention is taken to occur at a point in time and, for the most part, does not continue or carry over to the following financial year. However, it believes that if a contravention remains unrectified by the end of a financial year, then this can cause an additional and separate contravention at the start of the next financial year.

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If a contravention is reported or detected by the ATO, there are four steps that the ATO case officer should apply when administering penalties:

  • determine if a penalty is imposed by law;
  • determine who is liable to the penalty;
  • determine if remission is appropriate; and
  • notify each trustee and/or each director of the corporate trustee of the liability to pay the penalty.

In addition to imposing penalties, the ATO has the power to apply one or more of the following compliance treatments:

  • issue an education direction;
  • accept an enforceable undertaking;
  • issue a direction to rectify;
  • disqualify a trustee;
  • issue a notice of non-compliance;
  • seek civil and criminal penalties.

This article focuses on how the administrative penalty system applies to self-managed superannuation funds (SMSF). For simplicity, we refer to the term “trustee” as including a director of a corporate trustee.

Administrative penalties

Under s 166, the ATO can impose administrative penalties in respect of certain rules including the following:

  • generally no lending to members or relatives: 60 penalty units;
  • generally no borrowing: 60 penalty units;
  • must comply with in-house asset rules: 60 penalty units;
  • must keep minutes: 10 penalty units; and
  • must keep records of changes of trustee: 10 penalty units.

A penalty unit is currently $222 and is subject to increases with the consumer price index. The penalty unit amount is indexed each 3rd July and will increase again on 1 July 2023. Indexation of the penalty unit was introduced in July 2017 when each penalty unit then was $180; thus, there has been a sizeable (23 per cent) increase in the amount of each penalty in the past three years.

An administrative penalty cannot be paid using SMSF resources. Accordingly, it is either the individual trustees or directors of a corporate trustee that are personally liable. Directors of corporate trustees are jointly and severally liable to the penalty, whereas individual trustees are each liable to the penalties imposed on each trustee. This means that a corporate trustee with two directors will receive one administrative penalty overall, but two individual trustees will get one administrative penalty each. This is one of the many reasons why corporate trustees are far superior to individual trustees. To read our article as to why you should have a sole purpose corporate trustee, please click here. Indeed, all SMSFs should have a corporate trustee to minimise the risk of these penalties, as all people commit sins and make mistakes and God may forgive them, but will the ATO?

Remission of penalties

When applying administrative penalties, the ATO has an unfettered discretion to remit all, part or none of a penalty imposed under s 166. When deciding whether remission is appropriate, the ATO considers the following:

  • the purpose of the penalty provision;
  • the trustee’s behaviour and circumstances;
  • the seriousness of the contravention;
  • any unintended or unjust results;
  • multiple penalties; and
  • multiple breaches of the same or different provisions.

The main objectives of the penalty provisions are to encourage voluntary compliance, promote consistent treatment and shift the behaviour of the trustee to not contravene again. The ATO considers the specific circumstances that resulted in a contravention before determining any remission.

Once the total penalty amount has been determined, the case officer must give written notice to each trustee of their liability and the reasons for this and an explanation on any remission.

If a trustee is dissatisfied with a decision to refuse to remit, in full or in part, then they may object to the commissioner. If they are not satisfied with the commissioner’s decision, they may apply to the Administrative Appeals Tribunal (AAT) or to the Federal Court for review.

Trustees’ behaviour and circumstances

When considering whether remission is appropriate, a case officer should consider factors that support remission and weigh them against factors that do not support remission. The ATO states that some factors in favour of remission include:

  • good compliance history;
  • rectification prior to ATO contact;
  • voluntary disclosures; and
  • circumstances beyond the trustees’ control.

The above would be weighed against factors not in support of remission, which the ATO states include:

  • poor compliance history;
  • awareness of obligations;
  • repeated bad behaviour;
  • multiple contraventions;
  • seriousness of contraventions; and
  • direct benefit gained through deliberate acts.

The important takeaway for trustees is that having good compliance history and taking swift action to rectify a contravention will work in their favour. The ATO appears to welcome trustees who take initiative, and this may help avoid more serious outcomes.

When seeking to rectify a contravention, trustees should demonstrate to the ATO their voluntary compliance, rectification action taken (or proposed rectification action) and demonstrate how they will avoid contravention in the future. Trustees can give an enforceable undertaking to the ATO to demonstrate how they intend to rectify the contravention and any other action they may take such as participating in SMSF education courses.

Hints on remission from the examples in the PS LA

The practice statement outlines the ATO methodology for its case officers to follow in respect of imposing and remitting penalties in 12 practical and typical examples.

Example 1 involves an SMSF providing a loan to a member where the trustee failed to seek repayment on six different occasions over two financial years. Each such failure was treated as a contravention subject to 60 penalty units — i.e. 6 multiplied by 60 penalty units multiplied by $222 per penalty unit; i.e. 360 penalty units x $222 = $79,920. Since there were two individual trustees, the combined penalty was $159,840 (i.e. 2 x $79,920). However, given this example involved a single course of conduct involved, the ATO case officer could remit the penalty to $13,320 for each trustee (i.e. 60 x $222), as one penalty is appropriate for a contravention that relates to a single course of conduct.

Example 7 involves two individual trustees who deliberately withdrew $50,000 to buy a new car. There were two contraventions: s 34 for paying a benefit early and s 65 for providing financial assistance to members. Given there were two contraventions, the ATO case officer could remit the penalty to the amount applicable for the primary contravention, as imposing a penalty for multiple contraventions for the one event may not be fair and just. Fortunately, in this case, the penalty under s 34 was $4,440, rather than a $13,320 for each trustee.

Example 8 is based on similar facts to Example 7, but the trustees withdrew 10 separate amounts of $5,000 to buy the new car worth $50,000 in the same financial year (i.e. 10 x $5,000). Based on the facts in Example 8, the ATO case officer could remit, in addition to the usual penalty (multiplied by 10) for the secondary (s 65) contravention but also the multiple penalties for the same event and could impose a single penalty of $4,440 on each trustee rather than imposing a $44,400 penalty (being 10 x 20 = 200 penalty units per trustee) for the multiple contraventions of the primary contravention. Thus, a potential $288,000 penalty in this example could be remitted to $8,880 (note the penalty units were lower in FY2016).

Example 9 provides an example of how the ATO may treat a primary and secondary contravention in relation to a loan that resulted in a contravention of s 65 (loan to a member) and pt 8 (in-house assets) over two distinct financial years resulting from two separate loan agreements. The case officer decided that the primary penalty for s 65 should apply for two financial years. That is $13,320 x 2 = $26,640 for each trustee.

Note that in Example 8, the 10 x $5,000 separate withdrawals were all made in the same financial year and were considered a single course of conduct. However, in Example 9, there were two separate loan agreements made in two separate financial years that were treated as separate contraventions. Another important factor reflected in Example 9 was that, even though Mr Smith was the active trustee who made all the decisions, the fact that Mrs Smith was a passive trustee who was aware of the loans did not result in any additional remission for her; that is, passive trustees should not remain passive and should seek involvement and accountability.

Conclusions

SMSF trustees must therefore play by the rules or suffer the consequences. Trustees should obtain advice before implementing any strategy, embarking on any significant transaction or where there is any doubt. Where there is a contravention, timely action should be taken to minimise any adverse consequences.

Administrative penalties can result in substantial penalties and one may question whether the “punishment fits the crime”. Indeed, we have been involved in numerous client assignments and in one case the initial s 166 penalty was well in excess of $500,000 prior to any remission. Considerable work was then involved in seeking remission.

Daniel Butler, director, and Bryce Figot, special counsel, DBA Lawyers

Examining PS LA 2020/3 and the ATO’s views on penalties
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