SMSF crackdown: Seven key messages for trustees
The net is tightening on trustees of self-managed super funds (SMSFs) who commit serious and not-so-serious breaches of superannuation law.
With little fanfare, the Federal Government has just released draft legislation for a finely-targeted penalty regime that should significantly increase the ability of the tax office – as regulator of self-managed super – to crack down on law-breaking SMSFs.
Under the Stronger Super reform umbrella, the draft law provides for the ATO to directly and personally fine trustees with a range of penalties to match the seriousness of the offence – without having to go through the courts.
Further, the ATO is to gain the power to instruct trustees to rectify breaches and to undergo special education. And the ATO will be empowered to take a much harder line against promoters of illegal early-access super schemes as well as fund members who prematurely gain access to their super.
The government plans for the measures to take effect from July next year. This proposed start day should be a big incentive for trustees to immediately get their affairs in order.
Despite being regulator of self-managed super for a decade, the ability of the ATO to adequately police wayward SMSFs is seriously hindered by weaknesses in the existing law.
Many fund trustees escape being penalised under the current regulatory regime even if members’ retirement savings are put at considerable risk by, for instance, entering illegal related-party transactions.
The final report of the Cooper superannuation review, handed down in July 2010, found that the tax office had limited tools to strike at fund trustees who fail to comply with superannuation law.
As the Cooper review explained, the current penalty regime effectively requires the ATO to take an “all-or-nothing approach” to penalising law-breaking trustees.
The ATO can take what Cooper refers to as the “nuclear option” of declaring that a self-managed fund does not comply with superannuation law. It is called the nuclear option because such action almost certain blows-up or destroys a SMSF.
Once a fund is made non-complying, its total assets – less non-concessional (after-tax) contributions – are taxed at the highest marginal rate. This means that a non-complying fund is at risk of losing up to almost half of its assets in tax.
Understandably, the tax office is reluctant to destroy a fund by removing much of the retirement savings of all its members. This means relatively few funds are declared non-complying each year. In 2011-12, the tax office made just 74 SMSFs non-complying – a truly miniscule number considering there are 470,000 funds.
Under the current law, the ATO can apply to a court for civil monetary penalties. And the Director of Public Prosecutions can pursue criminal prosecutions against trustees.
However, civil or criminal court cases are costly and time-consuming with disproportionately high penalties for the less-serious breaches.
As Peter Burgess, technical director for the Self-Managed Super Fund Professionals’ Association of Australia (SPAA), says: “The problem with the present penalty regime is it is very hard for the ATO to take action against trustees who do the wrong thing.”
Burgess says that if the ATO usually asks fund trustees to accept an enforceable undertaking to rectify a breach within a certain time. “But if the trustees don’t fix the problem and are repeat offenders, the ATO will typically take away the fund’s complying status, which has quite drastic implications for the fund.”
The explanatory memorandum for the draft legislation explains: “The regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.”
“The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening conduct by simply rectifying the conduct when it is detected,” the memorandum adds. “This may be appropriate in certain circumstances but is not appropriate that trustees can continue to contravene the law and for their actions to have no consequences.”