SMSF penalties – You need to be aware!

Matt Richardson

The penalty regime for SMSF Trustees has been in place for over 12 months now and it is appropriate we remind Trustees what they need to be aware of.

The ATO Commissioner will impose penalties where certain SMSF breaches have occurred. But firstly, the Commissioner needs to confirm the actual contravention before any penalty can be applied.

The Commissioner will expect, in most instances where a Trustee or Auditor identifies an issue or contravention, it can be rectified as soon as possible without ATO assistance. The auditor has a responsibility to report the contravention but ideally they would also report the issue has been addressed by the Trustees. This would generally be sufficient for the Commissioner to not take the issue any further.

It is important to note, where the ATO identifies a contravention during an ATO audit, the Commissioner MUST impose a penalty (without discretion). This is another reason not to wait until the ATO gets involved before rectifying a breach.

Once a penalty is issued, the Commissioner does have discretion to remit the penalties, either partly or in full. In instances of ongoing non-compliance or regular breaches, the ATO is unlikely to alter their stance on the penalties. However, if the breach is a “once-off” and the Trustees can highlight their efforts to rectify the breach, the chances of the penalty being remitted will be significantly increased.

So what are the penalties the Commissioner might dish out?

  • For breaches of in-house asset rules (eg loans to members or relatives, renting residential property to members or relatives, breaching of borrowing rules) – Penalty = 60 Penalty Units = $10,800;
  • For not meeting various operational standards (eg not having a documented investment strategy in place) – Penalty = 20 Penalty Units = $3,600;
  • For not meeting accounting & record keeping obligations – Penalty = 10 Penalty Units = $1,800;
  • For failing to comply with an ATO education direction (eg where the ATO have identified a minor breach) – Penalty = 5 Penalty Units = $900.

What should trustees do?

Trustees should always remember “The Sole Purpose Test”. That is, the purpose of a Self-Managed Superannuation Fund is to provide retirement, death or disability benefits for members (and nothing else). If you try to use your SMSF for any other purpose, the odds are you will be found out (remember – auditors are obliged to report a breach) and penalties WILL be meted out.

If you have any queries about a transaction, just contact the GTP team!

One last thing – if you get a chance to make someone’s day, just do it!