20 | Penalty Units for SMSF Trustees
Penalty units for SMSF trustees can cost you dearly – up to $12,600 per trustee to be exact.
Penalty Units for SMSF Trustees
As an SMSF trustee you must run your SMSF by the books. You need to comply with the SIS Act and Regulations and everything that follows.
If you break these rules, the ATO as the regulator of SMSFs has various actions at their disposal to force you into compliance. One measure it to hit you with administrative penalties. And these are all about penalty units.
Penalty units – abbreviated as PU – are a concept that is neither new nor unique to superannuation. You can find PU 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 value of one penalty unit by the number of penalty units prescribed for the offence.
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.
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.
The current value of a federal penalty unit is $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.
The value of a federal penalty unit has been $210 since 1 July 2017. But not long ago it was still $170 (2014/15) and then $180 (2015/16 and 2016/17).
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.
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, appoint an investment manager in writing or provide required information to the ATO as the regulator of SMSFs will get you 5 units.
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.
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. Or disqualify you as a trustee, freeze your SMSF’s assets or allow you to wind up.
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.
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’.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
Liability limited by a scheme approved under Professional Standards Legislation.
Last Updated on 10 February 2019
Share this entry
CONNECT WITH US
Got a question? Just call, email or use the contact page.
Our email address is firstname.lastname@example.org.
We are also part of Australia's tax news podcast - Tax Talks.