Trustee penalties and responsibilities

I’m a relatively passive trustee of my SMSF – my partner looks after the day to day running of the fund and I simply sign the financials each year. Am I exposed to penalties should something go wrong?

In short, yes.

Prior to 1 July 2014 the ATO had very limited options on how to deal with funds with ongoing compliance problems. Their options were effectively to either do nothing, or to make a fund non-complying.

Being made non-complying results in the fund’s assets being taxed at the top marginal rate (45%), and all income earned after the date of non-compliance also being taxed at this rate (as well as removing several other important tax concessions). Given this draconian outcome, making a fund non-complying often undermined the integrity of the superannuation system to a much larger degree than the original compliance problem ever would have, so the ATO often chose to do nothing.

Cue the implementation of administrative penalties.

Administrative penalties are a compliance tool that was introduced to help the ATO bridge the gap between sitting on their hands, or decimating someone’s retirement savings.

Broadly speaking, administrative penalties allow the ATO to levy a monetary penalty on a fund’s trustee for failing to comply with certain sections of the superannuation law. The specific penalty will depend on the section that has been contravened however, they range from $1,110 all the way up to $13,320. The trustees of approximately 200 SMSFs were levied administrative penalties in 2019/20. 

Somewhat frustratingly, the ATO has been largely inconsistent in its approach to levying these administrative penalties. This inconsistency puts trustees who have contravened the law in an uncomfortable and stressful situation, waiting for the ATO to make a determination and being uncertain as to whether penalties will be applied. 

Late in the 2019 calendar year the ATO announced that it would now be running a “hard line” approach on administrative penalties. Their default position now being: if the fund is reviewed by the ATO (which is fortunately relatively rare) and they discover a contravention has occurred then penalties will be applied. Any remission of penalties would be assessed in a secondary process and (as before) be at the Commissioner’s discretion.

Due to the effects of Coronavirus the ATO never fully enacted their “hard line” enforcement policy and has, quite rightly, maintained a “softly softly” approach to both administrative penalties and compliance in general across this period.

In a sign that things may be changing, and the “hard line” approach may be making a comeback, the ATO has recently released a practical guide (PS LA 2020/3) outlining their process for applying (and remitting) administrative penalties along with a few illustrative examples of the process.

This guide now clarifies the ATO’s position (quite definitively) for those trustees who are actively involved in the management of their fund, when a compliance breach happens on their watch.

But what about those trustees who aren’t actively involved with their fund, maybe their spouse does the day-to-day running of the fund. Will they be hit with the new application of administrative penalties?

Broadly speaking yes.

The guide makes it very clear that passivity on the part of a trustee or director is not an acceptable argument for the remission of a penalty. 

All trustees, not only those handling the day-to-day running of the fund, have an obligation to ensure that the fund’s compliance is maintained but also that they understand the nature and impact of any transactions entered into by the fund. In short, all trustees/directors need to be active participants in the management decisions of the fund.

It is simply not good enough anymore to say: “I didn’t know, the other trustee did it all.”

Does this mean that all trustees necessarily need to sit there pressing the buy and sell buttons in their portfolios?

No.

Does this mean that all trustees need to become superannuation experts and know all facets of the superannuation law? 

Of course not.

But you do need to know what your fund is doing, have an idea of what its money is invested into, familiarise yourself with the general compliance rules and requirements of the fund, understand how the rules interact with what your fund is doing, and, most importantly, seek help and advice when you’re out of your depth.

The ATO has made it clear – it is no longer good enough to bury your head in the sand.