Newsletter:

Super News - ATO risk-management – What SMSF trustees should be aware of

16 August 2019

Yvette Cree, Manager, Superannuation |

The increase in complexity of superannuation legislation along with the rise in the reporting requirements for superannuation funds has resulted in a riskier environment for Self-Managed Superannuation Fund (SMSF) trustees.

With the superannuation legislation changing so frequently, it is easy for trustees to make unintended errors in their SMSF and not be aware of the mistake for some time – usually when their accountant or adviser prepares the fund’s annual financial statements, or when the auditor is reviewing the fund’s year-end financial report and tax return. Many practitioners have identified this risk and have moved towards daily transactional processing in order to be able to rectify compliance breaches as soon as possible after they arise.

It is essential for SMSF trustees to understand how the ATO are dealing with non-compliance and breaches, and proactively work with their advisers to prevent errors in the first instance or at least rectify issues as soon as possible because the ATO can impose some severe directions and penalties on SMSF trustees for easily made errors.

In addition, it is necessary for trustees to increase their knowledge and understanding of what is involved in establishing and running a SMSF.

ATO non-compliance directions

The ATO lists several courses of action for the management of non-compliant SMSF trustees. These actions are designed to educate and encourage SMSF trustees to comply with super laws, however, in certain circumstances the ATO has been known to take a harsher approach:

  • Education direction
  • Enforceable undertaking
  • Rectification direction
  • Administrative penalties
  • Disqualification of a trustee
  • Civil and criminal penalties
  • Allowing the SMSF to wind up
  • Notice of non-compliance
  • Freezing an SMSF’s assets.

In our experience at BDO, the most common ATO non-compliance directions are the imposition of administration penalties and requiring the SMSF to wind up. We have also found that engaging with the ATO as soon as possible and working through issues with an ATO case officer has provided a better outcome for SMSF trustees and the fund.

Administrative penalties

We are seeing an increase in the ATO imposing administrative penalties for breaches of the Superannuation Industry (Supervision) Act 1993 (SISA). The SISA includes penalties ranging from five to 60 penalty units, at a price currently of $210 per unit. This means one breach could cost up to $12,600. It’s important to also remember that these administrative penalties are applied differently depending on the structure of the trusteeship of the Fund. For a Fund with individual trustees, the administrative penalty is imposed on each trustee, whereas for a corporate trustee, the penalty is only imposed on the corporate trustee. For a SMSF with two individual trustees, the penalty per breach could be up to $25,200 (i.e. $12,600 x 2) whereas a corporate trustee will only ever be imposed with one administrative penalty (i.e. maximum of $12,600 per breach).

Similarly, however, the penalties are not to be paid using SMSF assets. For individual trustees, these must be paid from personal monies, and for a corporate trustee, the directors are jointly and severally liable.

Penalty units

Individual trustees and directors of corporate trustees are personally liable to pay an administrative penalty if they contravene the following provisions of the Superannuation Industry (Supervision) Act 1993 (SISA).

Provision in SISA Description Administrative penalty units Administrative penalty cost
Subsection 34(1) Operating standards 20 penalty units $4,200
Subsection 35B(1) Accounts and statements 10 penalty units $2,100
Subsection 65(1) Lending to members and relatives 60 penalty units $12,600
Subsection 67(1) Borrowings 60 penalty units $12,600
Subsection 84(1) In-house assets 60 penalty units $12,600
Subsection 103(1) Duty to keep minutes 10 penalty units $2,100
Subsection 103(2) Duty to keep minutes of meetings 10 penalty units $2,100
Subsection 103(2A) Retention of copy of section 71E election 10 penalty units $2,100
Subsection 104(1) Duty to keep records of changes of trustees 10 penalty units $2,100
Subsection 104A(2) Declaration of recognition of obligations and responsibilities 10 penalty units $2,100
Subsection 105(1) Duty to keep and retain member or beneficiary reports 10 penalty units $2,100
Subsection 106(1) Duty to notify of significant adverse events 60 penalty units $12,600
Subsection 106A(1) Duty to notify of change in status of entity 20 penalty units $4,200
Subsection 124(1) Written appointment of investment managers 5 penalty units $1,050
Subsection 160(4) Education direction 5 penalty units $1,050
Subsection 254(1) Information to be given to the regulator 5 penalty units $1,050
Subsection 347A(5) Participation in the regulator’s statistical program 5 penalty units $1,050

Some of the most common breaches have the highest amount of penalty units applied to them: lending, borrowing and in-house assets. An example of how these administrative penalties could very quickly add up , for example, is where a SMSF has four individual trustees, and the trustees accidently make a withdrawal from the Fund’s bank account. This accidental withdrawal may be deemed a loan to a related party, which could result in not only a breach in the lending provisions (SISA S65(1)), but may also fall under the in-house asset provisions (SISA S84(1)). In this instance, each breach has 60 penalty units applied, and each trustee is penalised individually, which totals 480 penalty units, or $100,800 (i.e. 60 penalty units x 2 breaches x 4 trustees).

What can trustees do?

Reviewing and reconciling data more frequently certainly does help to mitigate the risk of trustee error, however, the most effective way to avoid any ATO scrutiny is for trustees to speak to their adviser, preferably before they undertake any unusual transactions, or as soon as possible after the event. Communicating with your adviser about any changes to the SMSF or unusual transactions may also provide an opportunity that you wouldn’t have otherwise been aware of.

We recommend alerting your adviser before:

  • Investing in a new asset type
  • Making a contribution
  • Purchasing a property
  • Selling a property (in or outside of super)
  • Making a withdrawal
  • Making a loan
  • Borrowing.

We understand that trustees do make mistakes and in order to rectify issues as quickly as possible, we suggest that you speak with your adviser if any of the following occur:

  • Incorrect deposits into the Fund’s bank account
  • Incorrect withdrawals from the Fund’s bank account
  • Assets purchased in the incorrect name
  • Overdrawing the Fund’s bank account.

Need help?

With increased reporting requirements and the current ATO non-compliance directions, the superannuation environment is certainly becoming more demanding for SMSF Trustees. The BDO Superannuation team has worked closely with the ATO to assist Trustees in rectifying compliance issues and to prevent errors from occurring in the first place. Please get in contact with us if we can assist in any way.

Disclaimer: Before making any investment or financial decisions you should consider, with or without the assistance of a professional adviser, your particular objectives, and financial circumstance or needs.
The information contained in this article is purely factual in nature and does not take into account your personal objectives, financial situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice.
Further, the above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. If you require personal advice that takes into account of your particular objective, financial situation or needs, you should consult your BDO adviser who will be able to assist you in their capacity as Australian Financial Services licensee.