27/02/2014

First it was in, then it was out, and now – it’s back in again.

Yes, the game of hokey pokey continues, with the proposed amendments to allow the ATO to impose financial penalties on SMSF trustees back on the table.

Importantly, these proposed powers are planned to come into effect on 1 July 2014, meaning that trustees should start considering now whether there are any current breaches that need to be addressed in the lead up to end of financial year to avoid a nasty fine being imposed.

ATO’s current powers for breaches

Currently, the ATO has rigid and inflexible rules for breaches which include taking trustees to court to seek a civil penalty or taking away the fund’s tax concessions or disqualifying the trustees thereby making the fund unviable or forcing the fund to be wound up.

These current options are often considered costly, time consuming and disproportionately draconian for the SMSF considering the severity of the offence.

The proposed new penalty regime

If the proposed new regime comes into effect the ATO will be able to impose administrative penalties on trustees which cannot be paid for or reimbursed from assets of the Fund – meaning the trustees will have to pay the fine out of their own pocket.

The proposed new regime will also allow the ATO to order trustees to attend compulsory education courses, again at the trustee’s personal expense.

The purpose of the new regime is to discourage minor or repeat breaches by using the simpler administrative penalties rather than the ‘all or nothing’ options currently available to the ATO.

From July anything reported in an auditor’s contravention report could result in a penalty being imposed.  For first offences the ATO may threaten to impose the penalty but let trustees off if they are able to correct the breach immediately, however trustees should not rely on such leniency as it is not guaranteed.

What it will cost you

The proposed fines will range starting at $850 for simple breaches including failure to comply with ATO education directives and failing to provide the Regulator with information on the approved form within the prescribed time.

Other fines weigh in at $1,700 to $3,400 for breaches such as failure to prepare Financial Statements, failure to keep fund records for least 10 years and failure to notify ATO of change of status of SMSF.

The heaviest penalty that has been proposed is $10,700 for breaches of lending or providing financial assistance to members and their relatives, breach of in-house asset rules, borrowing by the fund (except as permitted) and failure to notify ATO of an event that has significant adverse effect on the fund’s financial position.

While of course no breach should be left to languish, if the proposed new penalties take effect it will be even more vital that Trustees ensure they are aware of their responsibilities and rectify any breaches immediately, otherwise they may find themselves with a penalty notice from the ATO.

Did someone say ‘revenue raising’?

The most recent full-year statistical survey produced by the ATO showed that approximately 2% of all SMSFs received an ‘auditor contravention report’ for prescribed SMSF contraventions – some 19,823 separate contraventions.  The ATO described that as a ‘relatively stable number’.

It then provided a table of the top 10 types of contravention.  Let’s look at that table and add the fine that is likely to apply:

With an expected minimum $150 million in fines to be collected it would seem that the SMSF sector is certainly doing its bit for the new government’s fiscal responsibility measures.

If you would like to avoid doing your bit then don’t hesitate to contact us with any contravention issues.  We may be able to help, please call Townsends Business & Corporate Lawyers on (02) 8296 6222.