What's happening?
It is important to remember an SMSF is subject to very stringent laws and regulations which govern how the Fund can be managed and how the assets within the Fund can be used. These are found in the Supervision Industry Supervision Act (SIS Act) and administered by the Australian Taxation Office (ATO).
On 1 July 2014, a raft of new penalties came into effect to help the ATO enforce the requirements of the SIS Act. These changes have dramatically increased the likelihood of the ATO taking action when a contravention is found.
What are the changes?
Previously, if an SMSF was not complying with the SIS Act, the ATO could only take a limited range of actions such as disqualifying the Trustee, declaring the fund non-compliant for tax purposes (i.e. removing valuable tax concessions), accepting an enforceable undertaking from the Trustee, or launching civil or criminal prosecution. These are usually time-consuming and costly.
However the ATO's new powers give it greater flexibility and a wider opportunity to deal with contraventions that previously would not have justified more complicated legal action.
The ATO now has the power to:
- issue administrative penalties for certain contraventions of the SIS Act. These penalties range from 5 to 60 penalty units (one penalty unit currently equates to $170.00). For example, the failure to prepare financial statements could risk an administrative penalty of $1,700.00 and allowing borrowing arrangements outside the permitted exemptions could risk a penalty of $10,200.00,
- require the Trustees of the SMSF to undertake an education course, and/or
- issue a direction forcing the SMSF to rectify the contravention.
The options available to the ATO depend on the nature of the contravention, of course. But it is important to note that if the ATO becomes aware of a contravention which has a penalty, the new regulations state that the ATO must impose that penalty.
If the Trustee of the SMSF is a company, the penalties will be imposed on the company and the directors will also be jointly and severally liable. When the Trustee is an individual, the penalty will be imposed on the Trustee personally.
What you need to know!
These changes signal a tougher approach by the ATO in ensuring that SMSFs comply with the rules and regulations. If you have an SMSF, it is essential that you become familiar with the new rules immediately and take steps to monitor your compliance.
If you have any queries about the changes and how they might affect your SMSF, please contact Mitchell Zadow, Managing Principal and Accredited Specialist in Commercial Law, on (03) 8561 3318.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.
