12 June 2014

Personal penalties for SMSF "breaches"

As we approach the financial year end, we would like to draw your attention to the 3 new options that the ATO have for enforcing Self-Managed Super Fund (SMSF) regulation on the trustees of a Super Fund.


Under the new laws, which are effective from 1 July 2014, the ATO can issue a:


1.     Rectification Notice – specific action given to the trustee to rectify contravention/s within a specific timeframe.


2.     Education Notice – person to undertake specified course of education within a certain time.


3.     Administrative Penalty Notice – If contravene certain SIS Act sections, an automatic penalty applies to the trustee/director of trustee company.


The penalty cannot be reimbursed from the fund and is applied per trustee.


Some common examples of breaches that could attract significant penalties are:    

  • expenses paid by the individuals on behalf of the Super Fund. This is a form of borrowing for the Fund and could incur penalties of up to $10,200 per trustee. If you are aware that this has occurred in your SMSF, then you should rectify this before 30 June. I.e. reimbursing the individual for the expense paid.
  • the bank going into overdraft is a form of borrowing for the Fund. Please ensure that the bank account is always in credit during the year.
  • non-super fund expenses are paid from the Super Fund bank account. This is a form of lending to the members and would also incur penalties of up to $10,200 per trustee. If you are aware that this has occurred in your SMSF, then you should rectify this before 30 June. I.e. reimbursing the Super Fund for the expense paid.
  • late lodgment of income tax returns – it will be critical that SMSF accounting records are supplied early in the year, as the process takes time, especially when having to deal with auditors who will be inundated as lodgment deadlines approach
  • Personal payment of a deposit on a property purchase for the SMSF is a form of borrowing – even if it is reimbursed soon after  

For those interested in the technical details, below are the SIS Act sections and the relevant penalty when contravened.  Remember that the penalties apply per trustee, so for 2 individuals they would be double these amounts:

 Rule Section  Penalty units  Penalty ($) 
 Failure to compy with the prescribed standards to the operation of the Fund  34(1)  20  $3,400
 Failure to prepare financial statements  35B  10  $1,700
 Prohibition on lending or providing financial assistance to members and their relatives  65(1)  60  $10,200
 Prohibition on super fund borrowing, except as permitted, e.g. limited recourse borrowing arrangement     67(1)  60  $10,200
 Breach of In-House Asset rules  84(1)  60  $10,200
 Failure to keep trustee minutes for at least 10 years  103(1) & (2)  10  $1,700
 Failure to retain an election under s71E for at least 10 years  103(2A)  10  $1,700
 Failure to keep records of change of trustees for at least 10 years  104(1)  10  $1,700
 Failure to keep Trustee Declaration for 10 years  104A(2)  10  $1,700
 Failure to keep member reports for 10 years  105(1)  10  $1,700
 Failure to notify ATO of an event that has significant adverse effect on the fund's financial position  106(1)  60  $10,200
 Failure to notify ATO of change of status of SMSF, e.g. fund ceasing to be a SMSF  106A(1)  20  $3,400
 Failure to make the appointment in writing where an investment manager is appointed  214(1)  5  $850
 Failure to comply with ATO Education directive  160(4)  5  $850
 Failure to give information to the ATO in the approved form  254(1)  5  $850
 Failure to complete a survey form  347A(5)  5  $850

If you believe you may have breached one of the items above and are unsure of what action to take, please contact us.

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This Newsletter, of necessity, has dealt with matters of a technical nature in general terms only. Clients should contact us for detailed information on any of the items in the Newsletter. No responsibility for loss occasioned to any person acting or refraining from acting in reliance upon any material in this Newsletter can be accepted by any member or employee of the firm.

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