Australian Taxation Office changing guidance on penalties relating to SMSFs

The Australian, 13 December 2019

The ATO has confirmed it is in the process of changing its guidance on the penalties relating to SMSFs.
The ATO has confirmed it is in the process of changing its guidance on the penalties relating to SMSFs.

Australia’s self-managed super fund sector is facing much higher cash fines after the tax office changed the way it applies its power over self-directed investors.

Leading auditors across the sector suggest the Australian Taxation Office (ATO) has changed how it fines SMSFs caught with “contraventions”, such as taking money out too early.

Since 2014, when the current cash penalty system for contraventions was introduced, the ATO generally rolled up breaches – such as multiple illegal withdrawals – into a single “breach” that prompted a single cash fine.

Now the ATO is applying the penalties per breach – the change in action has prompted auditors to cry foul as SMSFs have not yet been formally notified of the change.

Moreover, the move might backfire as there is a risk that SMSFs will actually take out more than they might have originally planned if they know the fines are now applied per breach.

Separately, the new action also implicitly favours funds with a corporate trustee rather than individual trustees since the fines are applied to the trustees.

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If a fund has a corporate trustee there will be one fine, if there are individual trustees (and there can be four trustees) then the fines could be four times higher.

Shelly Banton, head of technical at AFT Audits in Adelaide said: “Of course, investors should first of all be compliant, but this is a big change and it appears to have been made mid-year.

“A problem is that these fines can really mount up – and they can’t be paid by the fund, they have to be paid personally,” said Banton.

The latest evidence of a sharper use of the ATO’s regulatory role and the parallel ability to raise funds will no doubt refresh calls for the removal of the ATO from its unique dual role in the SMSF sector as regulator and tax police.

In a note released earlier this week, industry advocate Meg Heffron of Heffron Consulting said: “The tax regulator has definitely become more assertive and active. They’ve been ramping up penalties on SMSF trustees.”

She added that “an increasingly active regulator is good for the sector”.

Early access to super is one of the lures often peddled by law breaking “advisers”.

In reality, early access to super is extremely difficult and only allowed where there are exceptional health circumstances, such as a terminal disease, where financial difficulties have also been encountered.

The tightening of SMSF regulation comes as ATO assistant commissioner Dana Fleming detailed recent activity to shut down a scheme promoter touting plans through which investors would get financial assistance from SMSF super.

In the Federal Court, the ATO took action against an unqualified and unregistered “adviser” for her role as a facilitator of illegal early release of super.

According to the ATO, in many cases she charged a fee for clients, who were not yet legally entitled to access their super, to transfer their funds from an APRA regulated fund to an SMSF so they could withdraw it.

Instead of having superannuation available for their retirement, the people involved reportedly used the money to fund a number of personal expenses, including home renovations and stamp duty.

The ATO took immediate action to shut down the scheme, with an interim injunction to stop the woman from promoting it further. The court ordered a financial penalty of $220,000 and she received an injunction that bans her from setting up SMSFs for a further seven years.

The ATO has confirmed it is in the process of changing its guidance on the penalties relating to SMSFs.