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

Introduction

With the penalty unit increasing from $222 to $275 from 1 July 2023 (~24%), and therefore the typical administrative penalty imposed on SMSFs under s 166 of the Superannuation Industry (Supervision) Act 1993 (Cth) of 60 penalty units increasing to $16,500 (ie, 60 x $275; in increase from $13,320 being 60 x $222), SMSFs need to be very cautious.

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 before the penalties increase. 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.

It is interesting to note that the Federal administrative penalty unit introduced in mid-2017 has increased by 23% over the 3-year period on 1 July 2020. From 1 July 2020 the penalty unit was automatically set to increase with inflation movements every three years and will increase by over 50% on 1 July 2023 on the 1 July 2017 amount. The table below highlights the substantial increases in the administrative penalty unit amount.

Penalty unit – increases since mid-2017

Typically numerous penalties are imposed at once

The difficulty is that contraventions do not typically happen in isolation but generally happen as part of a series of events, eg, a person who borrows or accesses money from their SMSF may access several withdrawals rather than making just one withdrawal.

Indeed, Justin Micale, Assistant Commissioner, SMSFs Risk & Strategy confirmed recently that there were around 3 auditor contravention reports on average for each of the 13,558 SMSFs. This totals 39,997 contraventions for FY2022 (ie, around 2.95 per SMSF). Thus, assuming there were three separate 60 penalty unit administrative penalties applied to the same SMSF, the amount saved with a corporate trustee would look as follows:

For many SMSFs it is not a matter of avoiding an administrative penalty but instead understanding that human error may one day give rise to one. While the ATO has some discretion, we have seen substantial administrative penalties issued to some SMSFs. At times the penalty has appeared out of line with the contravention or ‘crime’ involved. A better approach for these penalties should be formulated as many trustees cannot afford such significant fines. Research has also indicated that higher penalties may also not necessarily change people’s behaviour.

The increase in the penalty unit and a stricter enforcement approach by the ATO is in certain respects the ‘nail in the coffin’ for individual trustees. The above shows the substantial savings that may eventuate from having a company act as an SMSF trustee and given that advisers may also be potentially liable, advisers need to be proactive to assist their clients make the move. Advisers should be educating and providing information to their clients of the increased risks associated with having individual trustees. This need is more important now as some SMSFs have increased their number of members given that the maximum number of members increased from four to six in mid-2021. However, as noted above, the maximum number of individual trustees is four in certain jurisdictions.

Administrative penalties

Under s 166, the ATO can impose administrative penalties in respect of certain rules including the following:

• generally, no lending to members or relatives: 60 penalty units;
• generally, no borrowing: 60 penalty units;
• must comply with in-house asset rules: 60 penalty units;
• must keep minutes: 10 penalty units; and
• must keep records of changes of trustee: 10 penalty units.

Conclusions

SMSF trustees must therefore play by the rules or suffer the consequences. Trustees should obtain advice before implementing any strategy, embarking on any significant transaction or where there is any doubt. Where there is a contravention, timely action should be taken to minimise any adverse consequences. Administrative penalties can result in substantial penalties and considerable work is involved in responding to these matters and seeking remission.

DBA Lawyers has assisted many SMSFs and trustees in relation to administrative penalties, ATO audits/reviews, notices of non-compliance, notices of disqualified person status and a range of other penalties. We also regularly assist SMSFs in relation to the ATO’s early engagement and voluntary disclosure service.

DBA Lawyers has also assisted many SMSFs and trustees in relation to their communications with the ATO including with preparing objections, seeking reviews by the AAT and appealing to the Federal Court. When an SMSF trustee lodges a formal objection they must cover each relevant ground of objection in appropriate detail. If the objection is unsuccessful, the trustee may wish to seek a review of the objection by the AAT or, if it involves a question of law, appeal to the Federal Court.

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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

• DBA Lawyers’ lost SMSF deed service
• Honey, I lost the deed!
• Dealing with a lost SMSF trust deed
• 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]) and Bryce Figot, Special Counsel, ([email protected]) DBA Lawyers

DBA LAWYERS

18 November 2022