Penalties on SMSF trustees to increase substantially, so definitely time to change to a corporate trustee

Introduction

With the penalty unit increasing from $275 to $313 from 1 July 2023, SMSFs need to be extremely careful as this results in most administrative penalties increasing from $16,500 (ie, 60 penalty units x $275) to $18,780 (ie, 60 penalty units x $313).

This article discusses administrative penalties under s 166 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and provides ways to minimise this risk. In particular, a sole purpose corporate trustee is strongly recommended.

Administrative penalties

The ATO can impose numerous penalties under s 166 of SISA, including the following:

• s 65(1): generally, no lending to members or relatives: 60 penalty units;
• s 67(1): generally, no borrowing: 60 penalty units;
• s 84(1): must comply with in-house asset rules: 60 penalty units;
• s 103(1): must keep minutes: 10 penalty units; and
• s 104(1): must keep records of changes of trustee: 10 penalty units.

Administrative penalties are imposed on the trustees/directors of an SMSF personally and should not be paid by an SMSF.

It is interesting to note that the penalty unit has increased by 74% since 1 July 2017 as summarised below.

Penalty unit – increases since mid-2017

Change to a corporate trustee or pay the cost

It is definitely a good time to move away from individual trustees and move to a corporate trustee as soon as possible. SMSFs that have individual trustees are subject to hefty penalties; such penalties multiply as the number of individual trustees increase. The table below shows the substantial savings that come with having a company act as an SMSF trustee given the number of individual trustees that can be involved (noting that some jurisdictions impose a maximum of four individual trustees):

Note, an SMSF should have minimum of two individual trustees.

Don’t funds that get penalised deserve it, anyway?

For many SMSF trustees/directors even though they never intend or plan to contravene, one day human error may result in a penalty being imposed, eg, making an unauthorised withdrawal or not immediately reimbursing an expense paid on behalf of a fund.

As the old saying goes, to ‘err’ (or make errors) is to be human. Added to this, SMSF auditors are far more active in reporting ACRs, especially given the ATO’s increased review of SMSF auditors.

With the substantial increase in the penalty of 74% in six years, query whether the penalties should be reviewed especially, as prior to any remission, some administrative penalties can start off at hundreds of thousands of dollars.

Can advisers be liable?

Given that advisers may be implicated in contraventions, especially if they give incorrect advice, advisers should be proactive in assisting clients move to a corporate trustee. Advisers can inform clients of the increased risks and how easy it is to be ‘pinged’, especially if the fund has individual trustees. Some clients may also argue that an adviser who has not been proactive in recommending a corporate trustee should pay the additional penalty.

Does one or multiple penalties get imposed?

ATO records confirm that contraventions generally occur in multiplies rather than as one off events as there were, for instance, around 3 auditor contravention reports (ACRs) for each SMSF for FY2022 with a total of around 40,000 ACRs for of the 13,558 (ie, around 2.95 per fund). Thus, assuming there were three separate breaches per SMSF, the amount saved with a corporate trustee would be as follows:

Note:

• An SMSF should have minimum of two individual trustees.
• Some jurisdictions also impose a maximum of 4 individual trustees.

Conclusions

The above highlights a compelling reason for every SMSF to have a corporate trustee. SMSFs with individual trustees should make the move as soon as practicable or suffer the consequences.

SMSF trustees/directors should obtain expert advice before implementing any significant transaction if there is any doubt. Further, if there is a contravention, timely action must be taken to minimise any adverse impact.

Advisers need to be proactive in notifying clients with individual trustees to show they care and minimise risk.

DBA Lawyers has assisted SMSFs in seeking a full or partial remission of penalties. We also regularly assist SMSFs in relation to the ATO’s early engagement and voluntary disclosure service (click here for our article on this topic).

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Related articles

• SMSFs and voluntary disclosure to the ATO
• Penalties on SMSF trustees to increase substantially, so definitely time to change to a corporate trustee
• The best time for an SMSF to make a voluntary disclosure to the ATO is now
• ATO Compliance action penalties for SMSFS
• A new Federal Court case on civil penalties
• ATO disqualifies an increasing number of SMSF trustees with adverse consequences

By Daniel Butler, Director ([email protected]), DBA Lawyers

8 July 2023