New powers for ATO to address SIS Contraventions

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Australian Taxation Office - SMSF & SuperannuationAs of the 18th of March 2014 the Tax and Superannuation Laws Amendment (2014 Measures No. 1) Act 2014 received Royal Assent, which gives the ATO new powers in it’s role as regulator of SMSFs to:

  • Issue Rectification Directions
  • Issue Education Directions
  • Issue Administrative Penalties

These new powers will apply from 1 July 2014. The act also sets penalties for Early Access Scheme promoters, which will apply from the date of Royal Assent, among other non-superannuation tax changes.

Rectification Direction

The Act gives the ATO the power to issue a Rectification Direction to the trustee/s of a fund. The Direction will require the trustee to take the action set out in the Direction, within a specified period, with the aim of rectifying a contravention. Failing to comply with a Direction is punishable by 10 penalty units, currently $1,700.

This penalty may be too low to encourage trustees to comply with the Direction, however the ATO would likely then proceed with other action, including making the fund Non-Complying. As the ATO will be unable to issue a Rectification Direction where there is a current Enforceable Undertaking it will have to be seen in practice how the ATO uses this new power – will the preference be to issue a Direction, or to wait for an application for an Undertaking?

Education Direction

The Act also gives the ATO the power to issue an Education Direction to the individual trustee/s of a fund, or the director/s of the corporate trustee, where the ATO reasonably believes there has been a contravention of the SIS Act or Regulations. The Direction requires the person to undertake a specific education course within a specified time and give evidence of completion to the ATO or face a penalty, currently set at $1,700. As no fee may be changed for the course, it seems likely that the ATO will be running the courses, though other courses may be approved. While there is no fee, any costs of attending the course cannot be paid or reimbursed from the fund. Also, trustees who are subject to an Education Direction will also have to sign (or re-sign) the Trustee Declaration.

Admin Penalties

The Act creates an administrative penalty regime for SMSFs to supplement the current processes. Previously the ATO had powerful, but limited, options to punish, encourage rectification and discourage contraventions of the SIS Act and Regulations. These pre-existing options were all severe, including making the fund Non-Complying, disqualifying the trustee/s from being trustee of an SMSF, or applying to a court for civil penalties. The Enforceable Undertaking process was similar to the Rectification Direction, but had to be initiated by the trustee/s, not the Commissioner.

The Admin Penalties will be a fine, currently ranging from $ 850 to $ 10,200, imposed on the individual trustee/s or the directors of the corporate trustee, where the ATO believes there has been a breach of one of the sections of SIS set out in the table below. The Admin Penalty can’t be paid or reimbursed from the fund, and the ATO may issue both an Education Direction and an Admin Penalty for the same contravention.

SMSF Administrative Penalties
Provision of the SIS ActName of ProvisionPenaltyDollar Value
Subsection 34(1)Prescribed operating standards
must be complied with
20 penalty units$ 3,400
Section 35BAccounts and statements10 penalty units$ 1,700
Subsection 65(1)Lending to members of regulated
superannuation fund prohibited
60 penalty units$ 10,200
Subsection 67(1)Borrowing60 penalty units$ 10,200
Subsection 84(1)In-house asset rules must
be complied with
60 penalty units$ 10,200
Subsection 103(1)Duty to keep minutes
and records
10 penalty units$ 1,700
Subsection 103(2)Duty to keep minutes
and records
10 penalty units$ 1,700
Subsection 103(2A)Duty to keep minutes
and records
10 penalty units$ 1,700
Subsection 104(1)Duty to keep records
of changes of trustees
10 penalty units$ 1,700
Subsection 104A(2)Trustees etc. of self managed
superannuation fund–recognition
of obligations and responsibilities
10 penalty units$ 1,700
Subsection 105(1)Duty to keep reports10 penalty units$ 1,700
Subsection 106(1)Duty to notify the Regulator
of significant adverse events
60 penalty units$ 10,200
Subsection 106A(1)Duty to notify Commissioner of
Taxation of change in status of
20 penalty units$ 3,400
Subsection 124(1)Investment managers must
be appointed in writing
5 penalty units$ 850
Subsection 160(4)Education direction5 penalty units$ 850
Subsection 254(1)The Regulator may collect
statistical information
5 penalty units$ 850
Subsection 347A(5)The Regulator may collect
statistical information
5 penalty units$ 850

The above table is based on the table from the Act, but includes the name of the provisions and the dollar value of the penalty units, currently $ 170 per unit. The original table is on page 13 of the Bill.

Interestingly, there are a number of important sections of the SIS Act which are not included in the Admin Penalty regime. For example, the following sections are required to be reported to the ATO as part of the Auditor/Actuary Contravention Report but for which Admin Penalties don’t apply:

  • S17a – SMSF Definition
  • S35C(2) – Provide documents to the auditor
  • s52(2)d – Separation of Assets
  • S62 – Sole purpose test
  • S66 – Acquisition of assets from related parties
  • S109 – Investments to be maintained on an arms length basis

Perhaps the thinking was that the ATO will proceed with Non-Complying status or other penalties, for these breaches rather than issue Admin Penalties? Leave your thoughts in Comments.

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