Penalty Units for SMSF Trustees

February 11, 2019| Heide Robson

Penalty units for SMSF trustees can cost you dearly – up to $12,600 per trustee.

As an SMSF trustee you need to follow certain rules. You need to comply with the SIS Act and SIS Regulations and everything that follows.

If you break these rules, the ATO as the SMSF regulator has 7 different actions at their disposal to force you into compliance. One measure is to hit you with administrative penalties. And these are all about penalty units.

Penalty Units

Penalty units – abbreviated as PU – are a concept that is neither new nor unique to superannuation. You can find penalty units across all statutory laws in Australia.

The Commonwealth of Australia and the Australian states and territories each have their own PU system with a different value allocated to that unit and a different manner and frequency of adjusting this value.

Fines are calculated by multiplying the number of penalty units prescribed for the offence with the value of a penalty unit.

The advantage of using units rather than actual dollar values is that the law doesn’t need to be amended each time penalties are adjusted to inflation or for other reasons.

Instead the law just says x number of units. And the value of these penalty units is set outside of the actual law.

Federal Penalty Units

Federal penalty units only apply to federal offences. The SIS Act is a federal law and so any breaches of the SIS Act are subject to federal penalty units.

Since 1 July 2017, the value of a federal penalty unit has been $210. But this value will increase on 1 July 2020 and then every 3 years on 1 July after that to account for inflation. The increase will be indexed to the All Groups Consumer Price Index.

Not long ago a federal PU was still $170 (2014/15) and then $180 a year later (2015/16 and 2016/17).

SIS Act

For any breaches of the SIS Act, ss166 SIS Act allocates penalties that range from 5 to 60 penalty units. The ATO refers to these as administrative penalties.

At currently $210 per unit, administrative penalties range from $1,050 (5 units) to $12,600 (60 units) per member. So if you have an SMSF with four individual trustees, you might look at a total penalty of 4 x $12,600 = $50,400.

Penalties

There are four mortal sins that will attract the highest penalty of 60 units. These are breaching the rules about lending in ss 65 (1), borrowing in ss 67 (1) and in-house assets in ss 84 (1) as well as failing to notify the ATO about significant adverse events in ss 106 (1).

Anything else will be treated less harshly. Breaching operating standards in ss34 (1) SIS Act attracts 20 units. Failing to keep proper minutes and records or to inform the ATO about a change of trustees or directors will get you 10 units. And failing to comply with an education direction, failing to appoint an investment manager in writing or failing to provide required information to the ATO as the regulator of SMSFs will get you 5 units.

No Discretion

There is no discretion when it comes to applying these penalty units. Administrative penalties are automatically imposed as per s166 SIS Act.

If you breach a certain subsection of the SIS Act, you automatically receive the stipulated number of units set out in s166 for that subsection.

As an example, breaching the lending rules in ss65 (1) SIS Act by lending to members and relatives attracts a penalty of 60 PU. The ATO can’t say, “We give Peter 60, Paul 50 and Mary 10 PU.” The ATO has no such discretion. If Peter, Paul and Mary breach the lending rules in ss 65 (1), they receive 60 units each. Not more and not less. End of story.

Remission

Where the ATO has discretion is in the remission of these penalties. This is where they can look at individual circumstances and exercise discretion.

A good compliance history and immediate action to remedy the breach will increase your chances that the ATO remits your penalties. Even more if you have a reasonable explanation how the problem occurred.

But don’t count on a remission in serious or frequent cases of non-compliance.

Combination of Measures

The ATO often combines administrative penalties with other measures like education or rectification directions or the issue of a non-compliance notice. So they fine you and then get you to clean up the mess.

Each Trustee

Each trustee might be subject to a fine. Be it the corporate trustee or individual trustees.

And this is one of the many arguments for a corporate trustee. Because if your SMSF has individual trustees, then each trustee cops the full fine.

Let’s say your SMSF with four individual trustees breached the borrowing rules in ss 67 (1). So each of you gets a $12,600 fine, meaning a total penalty of 4 x $12,600 = $50,400.

If you a have a corporate trustee, one penalty of $12,600 is levied on the company. Each director is jointly and severally liable to pay that penalty but it is only one penalty, not four.

Not from SMSF Assets

You can’t pay the administrative penalties from SMSF assets since the penalties are imposed on the SMSF trustee directly.

As an individual trustee you need to pay the penalties from your personal savings. For a corporate trustee each director is jointly and severally liable.

ATO

The ATO’s compliance philosophy is to prevent rather than correct. They want to support you as SMSF trustees to establish and maintain good compliance from the start. Getting you to do the right thing from the start is much easier for all involved than to wield the heavy stick later on.

Units v Points

You might have heard of penalty points instead of units. Same thing. Statutory law uses the term ‘units’ but the SMSF community often talks of ‘points’.

Adverse Tax Consequences

Sometimes penalty units are just the side show. The real issue is often the tax treatment you face as a result of a breach.

Take a non-arm’t length acquisition of assets as an example. If you acquire an asset at non-arm’s length, then all income from this asset, including the subsequent capital gain is treated as non-arm’s length income and taxed at the top marginal tax rate (45%). This might cost you millions of dollars, but definitely a lot more than the 60 penalty unit you might get.

So don’t just look at penalty units or points. Always consider the resulting tax treatment as well.

Does all this make sense? If you have a question, please call or email us. There might be a simple answer to your question.

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Last Updated on 14 March 2020