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How to avoid tough new SMSF penalties

John Wasiliev

There is a new year resolution that self-managed (DIY) super fund trustees would be smart to adopt in 2013. Over the next six months, make sure your fund is up to speed with major or even minor administrative issues or face some severe hip-pocket penalties that must be paid personally.

How about a $10,200 penalty for lending money to a fund member or a relative who needs some financial assistance? Or a similar fine for failing to comply with the superannuation in-house asset rules where a fund owns certain investments from which members gain a benefit?

The most common breach

Funds lending money to members or relatives personally is ranked as the most common breach by DIY funds. Mistakenly or deliberately withdrawing money for a fund bank account – even innocently – could attract a hefty penalty, even if the money is repaid.

While a DIY fund can lend money to a member or relative’s business, this must comply with the in-house asset rules that limit such loans to no more than 5 per cent of the fund’s total assets at any time. Such exposure must be constantly monitored, with any breach requiring the loan to be repaid plus the prospect in future of an administrative penalty.

There is a $3400 penalty for failing to comply with the preservation rules that set down when super benefits can be withdrawn, and a $1700 penalty for not preparing financial accounts and statements when required, or a similar fine for failing to keep appropriate fund records for specified periods.

Legislation introducing these penalties, says Craig Day of Colonial First State, is before federal Parliament, and approval is expected ahead of a July 1, 2013, introduction date.

No more Mr Nice Guy

The particular feature of these penalties, says Day, will be the way they change how DIY fund trustees are punished by the Australian Taxation Office for relatively common breaches.

So far, he says, DIY funds have had it pretty easy, as the ATO is not being as strict as it could with common breaches. The reason for this is the rigid rules for breaches where the ATO has three choices it can follow if it wishes to penalise funds.

It can either take away a fund’s tax concessions and effectively force it to be wound up; it can disqualify the trustees, which can have a similar effect; or it can take the trustees to court and seek a civil penalty, along the lines of the penalties that will be imposed under the new regime. But such legal action can cost more in expenses than the fines that are imposed.

Base amount boosted

Another related issue, says Day, is a 55 per cent increase in the base amount used to apply penalties. Penalties are imposed according to a penalty unit regime where certain penalty units apply to particular offences. For example, breaching the prohibition on lending or providing financial assistance to members would incur 60 penalty units.

Until the end of November, each penalty unit carried a monetary fine of $110 so the fine for 60 penalties was $6600. This per-unit-fine has, however, been increased by government legislation to $170, lifting the cost of a 60-penalty offence to $10,200.

The new, higher charge will apply from the end of this month and will be reviewed every three years by the Attorney-General with a plan to increase it in line with inflation.

The significant aspect of the new penalties, says Day, is that, from July 2013, instead of having to take individual DIY funds to court to seek a civil penalty, the ATO will be able to impose these fines against fund trustees as administrative penalties under the Tax Administration Act, much like it imposes penalties against taxpayers for late income tax returns.

Existing penalties will also be increased in line with the higher $170-per-penalty-unit charge.

Common breaches

The new regime will mean that, just like penalties are imposed if tax returns are lodged late, DIY fund trustees can be very simply penalised for common breaches.

Day says while it could be that for first offences under the new regime, the ATO may threaten to impose penalties and let trustees off if they correct the breach immediately, such leniency won’t last.

Under the act, a trustee would likely be able to appeal against a penalty to the Administrative Appeals Tribunal, but there won’t be any requirement on the ATO to involve a court when it comes to imposing a penalty.

Day says the most common fines for breaches will carry penalty units ranging from five units to 60 units, equal to an $850 to $10,200 value.

Trustees can be fined 20 units or $3400 if they breach contribution rules and contribute to super if they are not eligible. Someone who is over the age of 65 and contributes without satisfying the work test, for instance, could face this if the offence is picked up by the fund auditor.

The extra sting as far as DIY super administrative penalties are concerned is that the money must be paid jointly by the trustees and can’t be reimbursed by the fund.

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