By Nicholas Ali
Trustees have greater clarity regarding the penalties they could face for SMSF breaches by the Australian Tax Office, including the option to have multiple breaches remitted. The ATO released the previously internal-only document Practice Statement Law Administration (PSLA) 2020/3 to the public in October which outlines the administration of penalties.
This document outlines the penalties that could be meted out including fines up to $12,600 for certain breaches. One penalty unit equates to $210 and there are some breaches that attract up to 60 penalty units. (you can view the full list of penalties here).
This can begin to get very expensive for trustees if there are multiple breaches; meaning they need to be more diligent than ever before.
In the 2019 financial year, the members of an SMSF withdrew $155,000 from the super fund, which was essentially the fund balance. The fund held no other assets except a small balance in two bank accounts.
The members did not meet a condition of release and therefore the auditor issued an Auditor Contravention Report (ACR). The fund intermediary provided the below reason for why the benefits were withdrawn from the fund:
“The client has reported this money was used to pay out a bridging loan on their home provided by relatives who all of a sudden terminated the arrangement, demanded loan be repaid and subsequently took them to court for non payment. They were under extreme stress with the possibility of losing their home over this matter.
At the time the funds were taken, they had every intention of refunding the money within a few months and definitely before the end of the financial year. The refund would come from the sale of several greyhounds which is part of their business. The sale of the greyhounds did not eventuate, and other financially pressing matters did not allow them to refund the withdrawal taken. Since then I have been in contact with the trustees and financially, they are very stressed and have not been able to work out a plan to refund this to date.”
In this case study, no contributions are made to the super fund and no repayments of the loan have been made to date. Nor was the loan documented and on arm’s length terms. The client now faces large fines from the ATO for withdrawing the funds without meeting a condition of release, the fund providing financial assistance to a member, the loan not being on commercial terms and failing to pay it back.
As previously mentioned, multiple breaches as prescribed in the PSLA 2020/03 guidance can be extremely expensive. But the ATO has also included provisions for trustees to be spared cumulative penalties under certain circumstances.
For example, in the provisions, trustees could be fined multiple times for a single mistake or breach. If this one course of action results in multiple contraventions of the same provision, multiple penalties can be imposed. The ATO has discretion under PSLA 2020/03 to remove some of these penalties if they are considered inappropriate.
In most cases, this would mean the penalty would only apply to the primary contravention, not every consequent contravention.
Individual trustees and directors of corporate trustees are to receive written notice from the ATO on why penalties have been administered for breaches, as well as an explanation for the reasoning behind any full or partial remission of penalties. A trustee or director who is dissatisfied with a decision to refuse to remit, in full or in part, an amount of penalty, may object and if dissatisfied with the Commissioner’s decision, may seek review by the Administrative Appeals Tribunal, or seek remedy through the courts.
Regardless of any leniency that may be afforded over multiple breaches, trustees now have a clear vision on how their actions can result in heavy fines. It is certainly advisable to read PSLA 2020/03 carefully to ensure these breaches don’t occur in the first place, as prevention is always better than the cure.