On 18 March 2014, the Tax and Superannuation Laws Amendments (2014 Measures No. 1) Act 2014 (Cth) (Act) received the Royal Assent.
The Act amends a number of other tax and superannuation laws, including the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). In particular, new Part 20 has been added to the SIS Act, introducing administrative directions and penalties for contraventions relating to self-managed superannuation funds (SMSFs), which occurred on or after 1 July 2014.
According to the Explanatory Memorandum to the Act, the objective of Part 20 is to provide the Commissioner of Taxation (Regulator) with effective and flexible additional powers, both educational and punitive, to address non-compliance by SMSFs with superannuation laws in conjunction with his existing powers.
What follows is an overview of the new administrative directions and penalties introduced by the Act.
Starting from 1 July 2014, the Regulator will have new powers to give to a person who is a trustee (individual or body corporate) of a SMSF or director of a corporate trustee of a SMSF:
- rectification directions; and
- education directions,
if the Regulator reasonably believes that a trustee or a director of a corporate trustee has contravened a provision of the SIS Act or the regulations.
A rectification direction is a written direction requiring the person to take a specified action to rectify the contravention within a specified period and to provide the Regulator with evidence of such rectification. Rectification should involve putting in operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.
It should be noted that some breaches, if not rectified, may result in trustees of SMSFs contravening the SIS Act or the regulations over a number of years, eg breaches with respect to borrowing by SMSFs or failure to comply with the in-house asset rules. It follows that a contravention, which occurred before 1 July 2014 and continued after that date, can result in a rectification direction given by the Regulator starting from 1 July 2014.
Failure to comply with a rectification direction within the period specified is an offence of strict liability attracting a penalty of 10 penalty units (currently $1,700).
An education direction is a written direction requiring the person to undertake a specified approved course of education within a specified period and to provide the Regulator with evidence of completion of the course. It appears that it will be appropriate for the Regulator to give education direction to a person where his or her lack of knowledge or understanding of their obligations has contributed to a contravention of the SIS Act or the regulations regarding SMSFs.
Failure to comply with an education direction within the period specified is an offence of strict liability attracting a penalty of 10 penalty units (currently $1,700).
The Regulator may approve courses of education provided by the Regulator or by another entity for the purposes of education directions. An approved course may not charge fees in respect of persons directed by the Regulator to do the course. However, there may be other costs associated with undertaking the course. Such costs shall not be paid or reimbursed by a SMSF in relation to which an education direction was given: eg costs of travel, access to the Internet, notifying the Regulator etc. It appears that the legislature intended that such costs be payable personally by the person to whom the direction was issued.
Starting from 1 July 2014, a trustee (individual or corporate) of a SMSF or a director of a corporate trustee of a SMSF will be liable to administrative penalties if they contravene provisions of the SIS Act specified in the table in new section 166 of the SIS Act. Administrative penalties are imposed only for the contraventions included in that table and only in relation to SMSFs, which are regulated superannuation funds.
It should be noted that the provisions of the SIS Act listed in section 166 must be complied with by all trustees of SMSFs, whether they are individual persons or corporate bodies. At the same time, certain provisions of the SIS Act apply particularly to directors of corporate trustees, eg signing trustee declarations by directors if the trustee is a corporate body. Respectively, a trustee or director who failed to comply with these provisions will be liable to a penalty.
The administrative penalties range from 5 penalty units (currently $850) for such breaches as failure to appoint an investment manager of a SMSF in writing, failure to comply with an educational direction before the end of the period specified etc to 60 penalty units (currently $10,200) for breaches related to borrowing and lending by SMSFs and non-compliances by SMSFs with the in-house asset rules.
If a trustee of a SMSF is a body corporate, which is liable to an administrative penalty, the directors of such trustee at the time it becomes liable to the penalty are jointly and severally liable to pay the amount of the penalty.
Given that ‘a trustee of a SMSF is liable’ to an administrative penalty, the total amount of the penalty imposed for a contravention of the same section of the SIS Act will increases with each individual trustee of the SMSF. For example, if a SMSF corporate trustee with two directors breaches the in-house asset rules, the penalty of $10,200 is imposed on such corporate trustee. Even though the two directors are jointly and severally liable to pay this penalty, its total amount remains the same.
However, if a SMSF has two individual trustees and they fail to ensure compliance with the in-house asset rules, the penalty of $10,200 is imposed on each individual trustee resulting in the total penalty of $20,400 being imposed.
It is worth noting that such contraventions as breaches with respect to borrowing and lending by SMSFs or failure to comply with the in-house asset rules, which occurred before 1 July 2014 and continued after that date, can result in administrative penalties imposed by the Regulator starting from 1 July 2014.
An administrative penalty must not be paid or reimbursed from the assets of the SMSF in relation to which the penalty was imposed. It appears that the legislature intended that a liability under the new administrative penalty regime is payable personally by the person who has committed the breach.
Everyone who manages their own SMSF should be aware of the increased importance of SMSF compliance and familiar with the new administrative directions and penalties provisions effective from 1 July 2014.
Furthermore, before 1 July 2014 attend to any breaches by your SMSF.
Consider your current SMSF structure as to whether you need to change your individual trustees to a corporate trustee to reduce the amount of liability in case of administrative penalties being imposed.