ATO’s New Powers – Another Reason for a Corporate Trustee

 

Effective 1 July 2014 the Tax Office will have new powers that will allow it to issue hefty penalty notices to trustees of superannuation funds who contravene the superannuation laws.

Under current legislation the Tax Office has limited power to address contraventions with the main powers being:

  •  Make the fund non-complying;
  • Apply to the court for civil penalties to be imposed;
  • Apply to the court for criminal penalties for more serious contraventions of the law;
  • Accepting an enforceable undertaking in relation to a contravention; and
  • Disqualifying a trustee of a self managed superannuation fund

Broadly there are three new powers available to the Tax Office which would allow it to more “effectively, flexibly and proportionately” address non compliance issues.  These new powers will include:

  •  Rectification Directions;
  • Education Directions; and
  • Administrative penalties.

Rectification Directions will require the trustee to undertake specific action to rectify a contravention within a specific period of time.  Upon completing the rectification the trustee must provide evidence of their compliance to the Tax Office.  In determining whether to issue a Rectification Direction to the Tax Office must first consider the financial detriment that might be suffered by the superannuation fund as a result of complying with the direction, the nature and seriousness of the contravention and any other relevant circumstances.  Failure to comply with a Rectification Direction will result in an additional financial penalty (currently $1,700).

A Rectification Direction cannot be issued with the Tax Office has already accepted an enforceable undertaking in relation to a particular contravention.

Education Directions require the trustee to undertake a specific course of education within a specified timeframe.  The costs of attending the course must be borne personally by the trustee and cannot be paid for, or reimbursed, by the superannuation fund.  Upon completion of the course the trustee must provide evidence of their compliance with the directions within 21 days of completing the course.  As is the case with Rectification Directions, failure to comply with the Education Direction will result in an additional financial penalty (currently $1,700).

Administrative Penalties are the final and the most significant addition to the Tax Office’s arsenal.  Administrative Penalties apply to specific contraventions and range from $850 through to $10,200 depending on the provision of the superannuation legislation that has been contravened.  Administrative Penalties are levied against the trustee personally and must not be paid for, or reimbursed, by the superannuation fund.  Interestingly, the list of provisions that may attract an Administrative Penalty does not include s.66 of the SIS Act which prohibits the acquisition of an asset from a related party and as such an Administrative Penalty cannot be issued when the trustee contravenes this section.

Please note that these are additional powers available to the Tax Office and they still retain their existing powers.  If proceedings are commenced by seeking a civil penalty then any Administrative Penalty imposed on a trustee must be refunded by the Tax Office.

Further it is important to note that the penalties can be imposed on all trustees so if you have two individual trustees then the penalties could be doubled.

Example

John and Sue are individual trustees of their superannuation fund.  They withdraw money from the superannuation fund’s bank account and deposit into John’s personal account.  They realise what they have done and journalise the withdrawal as the purchase of an unlisted share from John and unwind the transaction.

Under the new penalty regime, the explanatory memorandum suggests that the following penalties could be imposed by the Tax Office:

  •  If not unwound adequately, a Rectification Direction could be issued requiring specific rectification action to be undertaken;
  • An Education Direction could be issued requiring John & Sue to attend a specific course;
  • An Administrative Penalty for the contravention of:
Section Breached Penalty
SISA s.65 – providing a loan to a member (60 penalty units – $10,200 for each trustee
SISA s.66 – acquisition of a prohibited asset from a member (no administrative penalty but there is the risk of imprisonment)
SISA s.67 – the prohibition on borrowing (60 penalty units – $10,200 for each trustee
SISA s.84 – in-house asset rules (60 penalty units – $10,200 for each trustee

Accordingly, from 1 July 2014 the Tax Office could issue Administrative Penalties totalling $61,200 and an Education Direction, the costs of which must all be borne by the trustees personally and not be reimbursed by the superannuation fund.

If, instead of being individual trustees, John & Sue’s superannuation fund had a corporate trustee of which they were both directors the Administrative Penalties would be $30,600.  Whilst the directors of the company would ultimately still be required to foot the bill for these penalties the penalties are levied on the trustee and not the directors of the trustee company.

In both examples the Tax Office still have the power, if the contravention is serious enough, to make the fund non complying.

Conclusion

Trustees of superannuation funds should take serious note of the Tax Office’s new powers.  Any contraventions of the superannuation laws post 1 July 2014 will be met with one or more of these new powers which will hit the trustee’s personally.

Obviously it goes without saying that the best way to avoid these new penalties is to comply with the superannuation law, however inadvertent errors may be hit hard by the new laws.  Individual trustees would be wise to consider converting to a corporate trustee to minimise the possible impact of these new penalties.  However before rushing out and changing to a corporate trustee consideration needs to be given to the costs of making the change and these will include not only the cost of the company and the deed of variation, the requirement to change bank accounts, the time and cost associated with getting share registries updated with the change of trustee details as well as the time and cost associated with changing title of property owned by the superannuation fund.

If you would like to discuss converting to a corporate trustee for your superannuation fund please feel free to contact one of the friendly team members in our SMSF division on 02 4721 6000