SMSF trustee obligations and penalties

This information is for Adviser use only

Other states have similar legislation.

A SMSF trustee also has additional obligations under the Superannuation Industry (Supervision) Act 1993 (SIS). Most notably, it must ensure that the fund complies with the legislation, such as in-house assets, borrowing restrictions and ensuring the fund satisfies its reporting obligations. A trustee may authorise another person or entity to perform various activities related to the operation of the fund, but the trustee cannot delegate its overall responsibility for those activities.

Penalties

The Australian Taxation Office (ATO) has wide ranging powers to levy penalties and directions. These powers were increased further on 1 July 2014 when the ATO received the ability to administer administrative penalties directly without having to go through the courts. This is part of a new system which allows the ATO to have a more graduated response to breaches depending on their seriousness.

Under this system, when a breach is brought to the attention of the ATO, they have the ability to issue a rectification direction, an education direction and/or an administrative penalty.

A rectification direction is simply a written direction from the ATO to take a specified action within a specified period of time to rectify the contravention. The trustees are also obligated to provide evidence of their compliance with that direction.

An education direction is a written direction requiring a person to undertake a specified training course within a specified period of time and to provide the ATO with evidence of completion of the course. The ATO will usually issue an education direction where they believe a trustee’s failure to comply with their obligations was due to a lack of knowledge and understanding of their obligations. The legislation prohibits a fee being charged for this course and in addition, a trustee cannot be reimbursed from the fund for expenses incurred to undertake this course, such as travel expenses.

The ATO also has the ability to apply administrative penalties for breaches outlined in the below table. The dollar amount of the penalties is based on a number of penalty units, with each penalty unit equal to $313 on or after 1 July 2023.

The penalty is levied at the trustee level and the trustee cannot be reimbursed from the fund. Plus, the penalty is levied per trustee, per breach. For example, where a fund borrowed funds to purchase shares for above market rate from a member, the trustee could be guilty of two major breaches, each carrying a penalty of $18,780.

For corporate trustees, the penalty is levied on the company with the directors jointly and severally liable for the penalty. For individual trustees, the penalty is levied on each trustee. This means for a two member fund, a doubling of the penalty for individual trustees.

Court levied penalties

In addition to the above penalties, the ATO have the ability to take SMSF trustees to court where the court can levy both civil penalties and criminal convictions under the SIS Act.

For example, where a new SMSF trustee doesn’t sign a trustee declaration within 21 days of becoming a trustee or fails to keep the declaration for 10 years, the court can levy a penalty of up to 60 penalty units ($18,780).

However, other offences are treated far more seriously. For example, someone who enters a scheme to avoid the prohibition on acquisitions from related parties is guilty of an offence which can be punished by imprisonment of up to one year.

Fund non-compliance

A final action the ATO can take is to make a fund non-complying. The ATO only does this in the most serious of circumstances due to the significant adverse consequences to the fund.

When a fund is non-complying, its assessable income is taxed at the top marginal tax from and including the income year the fund is made non-compliant. Furthermore, any taxable component of benefits held for members have to be included in the assessable income of the fund for the year it is made non-compliant.

For example, a SMSF with $500,000 of benefits in accumulation, where $300,000 is taxable and $200,000 is tax-free and income of $50,000 for the year, would have an income tax liability of $7,500 if it was a complying fund.

If that fund was declared non-complying, the $300,000 of taxable component would be included in the assessable income giving a total of $350,000. Plus, that income would no longer be taxed at 15% but at the highest marginal tax rate.

Contributions made to a non-complying superannuation fund are not tax deductible and all employer contributions made on behalf of an employee or their associate will be subject to fringe benefits tax.

Next: Insurance within super: realising benefits and avoiding pitfalls