With the penalty unit increasing from $313 to $330 in proposed legislation, SMSFs need to be extremely careful as this results in most administrative penalties increasing from $16,500 (ie, 60 penalty units x $275) to $19,800 (ie, 60 penalty units x $330). This follows the increase from $275 to $313 that already occurred on 1 July 2023.
This article discusses administrative penalties under s 166 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and provides ways to minimise this risk.
Penalty units can be applied by the ATO under s 166 of SISA, for many reasons including:
Administrative penalties are imposed on the trustees/directors of an SMSF personally and should not be paid by the SMSF.
It is interesting to note that the penalty unit has increased by 83% since 30 June 2017 as summarised below.
Penalty unit
Increase from 30-6-2017 penalty
*The increase to $330 was announced in the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) released on 13 December 2023 and will apply to offenses committed after the start date once the legislation is finalised. The penalty unit amount will then be indexed every three years in line with the consumer price index.
It is definitely a good time to move away from individual trustees and move to a corporate trustee. The table below shows the substantial savings (when considering the trustee-group as a ‘whole’) that comes with having a corporate trustee.
For each of the examples below, we use the example of a breach of the borrowing rules which attracts 60 penalty units at the proposed new rate of $330 (60 x $330=$19,800).
– An SMSF should have a minimum of two individual trustees.
– Some jurisdictions also impose a maximum of 4 individual trustees.
Number of individual trustees/ directors
Total penalty with individual trustees
Total penalty with a corporate trustee
Total saving with company
For a single administrative penalty to be imposed on a corporate trustee (differing from a penalty imposed on each individual trustee), the corporate trustee must have been appointed prior to any contravention. Thus, timely pro-active action is needed to obtain the benefit of the single application of one penalty on a corporate trustee (compared to a penalty being imposed for each individual trustee).
ATO records confirm that contraventions generally occur in multiplies rather than as once-off events as there were, for instance, around 3 auditor contravention reports (ACRs) for each SMSF for FY2022 with a total of around 40,000 ACRs for of the 13,558 funds (ie, around 2.95 per fund).
Thus, assuming there were three separate breaches per SMSF (3 events x 60 penalty units x $330 for each unit = $59,400 would be payable with a corporate trustee), the amount saved with a corporate trustee would be as follows:
Number of individual trustees/ directors
Total penalty with individual trustees
Total penalty with a corporate trustee
Total saving with company
The ATO’s Practice Statement PS LA 2020/3 outlines grounds for remission of administrative penalties imposed via s 166 of the SISA. Remission may be sought, for example, where there is a series of contraventions relating to the same matter.
Many trustees put off moving to the corporate trustee model because they do not expect to contravene the law. This can be a risky gamble as it is our experience that even trustees that consider their fund management to be diligent and honest can face hefty penalties due to contraventions linked to human error. As the saying goes, to err is to be human and a common example of human error resulting in unsuspecting trustees facing penalties is the making of an unauthorised withdrawal or a failure to immediately reimburse the member for an expense paid on behalf of a fund.
In addition to the increased severity of a contravention, trustees now also face an increased probability of being caught with the ATO increasing its pressure on SMSF auditors; resulting in SMSF auditors being more inclined to issue ACRs for actual or potential contraventions.
Given that advisers may be implicated in contraventions, especially if they give incorrect advice, advisers should be proactive in assisting clients move to a corporate trustee. Advisers can inform clients of the increased risks and the substantial increase in penalties for individual trustees and the fact that mistakes may arise along the way. An adviser who has not been proactive in recommending a corporate trustee may be asked to pay the additional penalty if the adviser has not brought the different treatment to the client’s attention.
With the substantial increase in the penalty of 83% in six years, query whether the penalty unit regime should be reviewed especially, as prior to any remission, we have seen some administrative penalties on SMSFs exceed several hundreds of thousands of dollars. Regardless, the different treatment in the application of administrative penalties on corporate trustees compared to individual trustees creates a compelling reason for every SMSF to have a corporate trustee.
As a general rule, SMSFs with individual trustees should make the move as soon as practicable or be exposed to the risks of suffering the higher penalties.
Advisers need to be proactive in notifying clients with individual trustees of the above risks and minimise risk. As noted above, timely action must be taken to minimise any adverse impact.
Naturally, expert advice should be obtained if there is any doubt. DBA Lawyers has also assisted SMSFs in seeking a full or partial remission of penalties. We also regularly assist SMSFs in relation to the ATO’s early engagement and voluntary disclosure service (click here for our article on this topic).
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly SMSF training online. For more details or to register, visit https://www.dbanetwork.com.au/dbalawyers/seminars3/1119/1683/SMSF-Online-Updates.html
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
DBA LAWYERS
31 January 2024
Download date: 06/09/2024 Copyright © DBA Lawyers Pty Ltd.
Any information provided on this website (including any blog posts) are mere summaries and general information provided for educational purposes only. This is no substitute for expert advice. Anyone seeking to rely on this content should obtain expert advice to confirm particular issues especially as the law is subject to ongoing changes and substantial penalties can be imposed.
As a law firm DBA Lawyers Pty Ltd is not licensed to give financial product advice under the Corporations Act 2001 (Cth).
