In a series of articles, we have outlined some of the things you should know – or might like to know – regarding superannuation fund audits.
In this article, we look at the area of superannuation penalties.
As you would have seen by our recent series on superannuation audit matters, SMSF trustees must run their super fund according to the superannuation rules.
At GNS, we love discussing stuff that might not be well known. A fairly recent development in super is that If a SMSF trustee breaks those super rules, financial penalties and other consequences may apply. When a SMSF trustee breaches certain super rules, the SMSF trustee can expect to be hit with what is known as an ‘administrative penalty’ ranging from $1,050 to $12,600 depending on the breach.
The administrative penalty provisions – imposing monetary fines – have been in place since July 2014. They arose because prior to then, the options for the ATO to punish misbehaving SMSF trustees were costly and time-consuming – and could involve making the fund ‘non-compliant’. This meant the fund could lose up to half of its money – which made the penalty more serious than the breach the SMSF trustee was being punished for. As a result, the ATO has rarely imposed the more onerous penalties on misbehaving SMSF trustees.
Since 1 July 2014, the new ATO powers to give directions and impose administrative penalties means that the ATO can punish SMSF trustees without the prospect of the trustees losing half of their retirement savings in penalties. You may even be ordered to go back to school, at your own cost!
There is a table summarising the penalties (here). As you see, penalties are measured in ‘penalty units’. This is to save a rewrite of the law every time the fines increase. A penalty unit is currently $210.
The table is from the ATO, so it lists sections of the Act and in some cases, not much detail about what the breach actually means. In our opinion, the main types of ‘bad behaviour’ are:
- failure to properly prepare financial accounts and statements (10 penalty units: $2,100 each)
- failure to keep SMSF money separate from personal assets (20 penalty units: $4,200 each)
- giving a loan to member or relative of member (60 penalty units: $12,600 each)
- failure to keep proper trustee minutes and records (10 penalty units: $2,100 each)
- failure to sign the SMSF trustee declaration within 21 days of becoming a SMSF trustee (10 penalty units: $2,100).
You will note the word ‘each’ in our list above. If the fund has individual trustees, each trustee is required to pay the fine. For example, where a SMSF has breached the lending rules, and the SMSF has four individual trustees, then each of the four SMSF trustees is liable to pay a $12,600 fine, totalling $50,400.
Directors of corporate trustees are ‘jointly and severally liable for the penalty’. This means the ATO may collect the entire penalty amount from only one of the directors, or any of the directors, until the penalty is fully paid. So, if you have a company as trustee, and you commit a breach, the fine will be less than if you have individual trustees.
The financial penalties cannot be paid or reimbursed from SMSF assets: the penalties are imposed on SMSF trustees directly and must be paid from personal savings.
If you would like to discuss the penalty regime, or think your fund may have a breach, give us a call for a chat.
Author – Philip Ruth is a registered SMSF Auditor at GNS Group. You can contact auditor Philip Ruth on 03 9499 7444.