There are generally 2 types of penalties the ATO can impose on SMSF Trustees for contraventions which have taken place:
Administrative Penalties – this is generally for minor breaches of the SIS Act. The ATO will normally request the Trustees to take measures to amend or correct the breach and providing this is done in a timely manner no further action will be taken.
Civil Penalties – The ATO can apply to the courts to impose civil penalties in certain cases. These penalties are obviously more substantial and relate to serious breaches of the SIS Act which would relate to:
Penalties are intended to achieve several objectives, including deterrence, denunciation and punishment. In determining the amount of the penalty, the courts will take into account:
Examples of Civil Penalties which have been issued over the last few years by the Courts for SMSF breaches include:
How to avoid the prospect of penalties?
If you always keep in mind the Sole Purpose Test (an SMSF should provide retirement, death or disability benefits for members) then this should keep you out of most tricky situations.
An SMSF is not a bank, or a source of temporary funds you can access for your business, regardless of whether you pay the money back with market rate interest.
If you are unsure about whether a transaction you are considering satisfies the SIS rules, check with a professional adviser first. Do not get your advice from a friend, neighbour, or someone you know who has told you they have put a similar transaction in place. The cost of the initial advice will be negligible compared to the potential penalties you could face.
(Acknowledgement to Daniel Butler, DBA Lawyers and his article in Self-Managed Super Magazine Issue 22)
Administration PenaltiesPenaltiesSelf ManagedSuperannuation