SMSFs and administrative penalties

Administrative penalties are just one of the many options available to the ATO to encourage fund trustees to comply with the superannuation law. They are a monetary “fine” levied on the trustee of a fund which has breached the rules.

The law dictates the amount of the penalty based on the seriousness of the particular provision breached. For example, the current penalty for failing to retain records is $2,100 but the penalty increases to $12,600 where funds loan monies to members/relatives. Multiple breaches can mean multiple penalties.

But the ATO has been able to levy penalties since 2014 so why are they getting attention now?

Prior to 2014, the ATO had little ability to take compliance action proportionate to the severity of a fund’s breach. Their only real option was to make a fund non-complying with the associated draconian tax consequences. When they were introduced, trustee administrative penalties were described as the ATO’s “new stick” to deter trustees from breaching the superannuation laws but achieved in a way which would be commensurate with the breach.

In the early years of their introduction, the ATO considered that only a limited number of cases warranted use of the administrative penalty powers and in almost all cases the penalties were remitted. For this reason, the ATO’s “stick” was considered more of a hypothetical threat with which to encourage compliance rather than a likely outcome when breaches were discovered.

However, we are seeing a change in approach from the ATO and a growing rise in the application of administrative penalties. Requests for remission are being denied in instances of serious and/or repeated non-compliance and, in other cases, penalties are only partially remitted. In 2017/18, approximately $1.7m in administrative penalties was levied. We expect this number to continue to rise.

If your client is levied an administrative penalty, it is important that they are aware:

• It may be possible for them to seek full or partial remission of the penalty. Outcomes will depending on the specific circumstances of the fund and its compliance issues. However, there are timeframes to be followed so trustees must act immediately on receiving a penalty if they wish to seek remission/object. 

• Administrative penalties are imposed on the trustees and cannot be reimbursed or paid from the fund. Trustees must pay these penalties out of their own pockets.

• Administrative penalties are levied per trustee. If the fund has individual trustees, each individual trustee is liable to a penalty. However, if the trustee is a company, a single penalty is levied to which the directors are then jointly and severally liable. This means the amount payable where a fund has two individual trustees will be twice as much as it would have been had the fund had a corporate trustee. Just another incentive for SMSFs to have a corporate trustee.

In summary, the threat of an administrative penalty is no longer a hollow one. Trustees and their advisers need to be aware of the real risk penalties will be applied if a fund breaches the law, even in cases of honest mistakes. Where penalties are applied and trustees believe their circumstances warrant remission, they should act quickly to make application to the ATO.