Legislative changes to administrative directions and penalties for contraventions relating to self-managed superannuation funds became effective from 1 July 2014 and applies to contraventions on or after that date, providing the ATO with flexibility as to the application of penalties for Trustees who breach their obligations.
Currently the ATO has limited choices when it wishes to penalise a self-managed superannuation fund or the trustees including:
- Making the SMSF non-complying for tax purposes
- Applying to a court for civil penalties to be imposed
- Accepting an enforceable undertaking in relation to the contravention and its rectification
- Disqualifying the trustee.
The new legislation was introduced to provide the ATO with the ability to apply gradual penalty measures enforced through the introduction of rectification directions, education directions and administrative penalties.
How are the new measures applied?
Rectification direction
A rectification direction is a written direction requiring a trustee or a director of the trustee company to take specified action to rectify the contravention and provide the Taxation Office with evidence of their compliance with the direction.
Education direction
An education direction is a written direction requiring a trustee or a director of the trustee company to undertake a specified course of education and to provide the Taxation Office with evidence of completion of the course.
Administrative penalties
If a trustee or a director of the trustee company contravenes a section of the SIS Act specified in the table in section 166, they are liable to an administrative penalty.
Some examples of contraventions and their penalties are outlined here:
| SISA Section | Rule | Administrative Penalty |
| 34 (1) | Contravene a prescribed standard: for example the requirement to formulate, review regularly and give effect to an investment strategy (including consideration of insurance) | $3,400 |
| 35B | Failure to prepare Financial Statements | $1,700 |
| 65 | Lending or providing financial assistance to members & their relatives | $10,200 |
| 67 | Super fund borrowings, outside the permitted exemptions (e.g. limited recourse borrowing arrangement) | $10,200 |
| 84 | Trustees have not taken reasonable steps to comply with the In House Asset Restrictions | $10,200 |
| 103 | Failing to keep trustee minutes for at least 10 years | $1,700 |
| 104 | Failing to keep records of change of trustees for at least 10 years | $1,700 |
| 104A | Failing to sign Trustee Declaration within 21 days of appointment and keeping for at least 10 years | $1,700 |
| 105 | Failing to keep member reports for 10 years | $1,700 |
| 106 | Failing to notify ATO of an event that has significant adverse effect on the super fund’s financial position | $10,200 |
| 106A | Failing to notify ATO of change of status of SMSF, e.g. super fund ceasing to be a SMSF | $3,400 |
| 124(1) | Fail to appoint investment managers in writing | $850 |
| 160 | Failing to comply with ATO Education directive | $850 |
| 254(1) | Failing to provide the Regulator with information on the approved form within the prescribed time upon establishment of the super fund | $850 |
| 347A(5) | Failing to complete a form with requested information provided by the Regulator as part of the Regulator’s Statistical Program | $850 |
Where a SMSF has individual trustees, the administrative penalty is imposed on each individual trustee.
Where the SMSF has a corporate trustee, the administrative penalty is imposed on the corporate trustee and each director of the corporate trustee is jointly and severally liable for the penalty. Only one penalty is applied to the corporate trustee whereas individual trustees may receive multiple penalties.
These penalties and costs incurred with an Education Direction cannot be paid from the SMSF and are not tax deductible.
Application of sanctions and penalties
The Taxation Office is given great discretion in applying the sanctions. It can impose administrative penalties concurrent with rectification directions and education directions for the same contravention. If the rectification direction is not complied with, or if a contravention of the same kind occurs in the future, the Taxation Office may apply further sanctions, including issuing a notice of non-compliance.
The ATO also maintains the ability to apply the existing penalties where they may apply.
New versus old regime
The new penalty regime relating to contraventions occurring from 1 July 2014 is likely to cost errant trustees and directors far more than the current regime where the breaches were not significant enough for the Taxation Office to make the fund non-complying. Under the new sanction regime, the Taxation Office is much more likely to impose the penalties and directions.
- Pre 1 July 2014 contraventions.
The new penalty regime does not apply to pre 1 July 2014 contraventions. Trustees of a SMSF have until 30 June 2014 to sort out the Fund’s issues
- Post 1 July 2014 contraventions – new contraventions first occurring on or after 1 July 2014
The new penalty regime will apply
- Straddling contraventions – contravention existing at 30 June 2014 and continuing beyond 1 July 2014
The new penalty regime applies to a contravention that occurs on or after 1 July 2014. A contravention that, for example, currently exists and continues beyond 30 June 2014 will be treated as a contravention that is occurring on or after 1 July 2014.
