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SMSF Trustee Penalty Regime
As you are aware, trustees of self managed superannuation funds (SMSF) are responsible for the running of the super fund and ensuring that the fund complies with the rules administered by the ATO.  It is important that trustees understand the responsibilities and obligations of being a SMSF trustee as there are significant penalties imposed for breaching these rules.
If you are unsure of the obligations and responsibilities of an SMSF trustee, the ATO website has a summary of these responsibilities including a publication to assist SMSF trustees.
Under the previous penalty regime, the only actions available to the ATO when imposing penalties on SMSF trustees were:
 
  • make SMSF non-complying for tax purposes (the fund’s assets will be taxed at 45%)
  • apply to the Court for civil penalties to be imposed
  • accept an enforceable undertaking from the trustee to rectify the breach, or
  • disqualify the trustee (ATO are hesitant on this course of action unless serious issue)
Apart from accepting an enforceable undertaking, these options were very harsh and allowed no ‘middle ground’ for forcing trustees to rectify breaches. 
The new trustee penalty regime will give three new additional powers to the ATO to issue a range of penalties on SMSF trustees who breach their obligations.  These penalties will apply for breaches that occur or are unrectified from 1 July 2014 and are detailed below.

Rectification Direction

The ATO can issue a written direction requiring you to take a specified action to rectify the breach within a specified time limit.  Evidence proving that the breach has been rectified must be provided to the ATO.  Previously the ATO has not been able to specify how and when a breach must be rectified.

Education Direction
The ATO can issue a written direction requiring you to complete a specified course of education by a certain date if it believes that you lack knowledge about your trustee obligations.  Evidence of completion of this course must then be provided to the ATO

Administration Penalties
As a SMSF trustee (or director of a corporate trustee) you may be personally liable for monetary penalties of between $850 and $10,200 if you breach a section listed in section 166 of the SIS Act.  Your SMSF cannot pay or reimburse these penalties to you (i.e. must be paid out of you own pocket).

Some examples of common breaches and their penalties are:

 

SIS Act Breach
 
Max. Penalty
SMSF lends money to a member or relative of a member
 
$10,200
SMSF borrows money (exceptions apply)
 
$10,200
SMSF does not take reasonable steps to comply with in-house assets rules
 
$10,200
SMSF does not prepare and retain financial statements for five years
 
$1,700
SMSF does not prepare and retain fund minutes and records
 
$1,700

 Higher Penalty for Individual Trustees
Where a SMSF has individual trustees the ATO will impose a penalty on each individual trustee meaning the penalty will be multiplied by the number of trustees. 

Corporate trustees will incur only one penalty as the directors are jointly and severally liable.  For example, if a SMSF has two individual trustees that have lent money to themselves, they can be fined $10,200 each ($20,400 in total).  However, if those two individuals were directors of a corporate trustee, the company would receive a penalty of $10,200 only.
Questions

We recommend contacting us to resolve any questions you may have and assist you in meeting your legislative obligations as trustees of your SMSF.
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