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  • The new administrative penalty regime: the ATO’s new stick

    Kasey Macfarlane, Assistant Commissioner,
    SMSF Segment, Superannuation, ATO

    Address to the Tax Institute National Superannuation Conference,
    Doltone House, Sydney, Thursday 20 August


    From 1 July 2014, the ATO has had three new regulatory compliance powers to deter and address contraventions of the Superannuation Industry (Supervision) Act 1993 (SIS Act) by SMSF trustees: education directions, rectification directions and administrative penalties. The new laws were introduced to give us more flexible and proportionate powers to deal with the various levels of non-compliant behaviour by trustees. We now have the flexibility to take enforcement action that is reflective of the severity of a breach. Today, I will address how the new regime works, its interaction with our existing enforcement and other powers, how we’re applying the regime and how it works for individual versus corporate trustees.

    I will also refer to four case studies to illustrate how the new regime will operate and interact with our existing powers.

    ATO’s SMSF risk-management framework

    The new powers don’t exist in isolation but are the newest tools in our SMSF risk-management toolbox – so I would be doing you a disservice if I didn’t talk more broadly about our work in managing risk in the SMSF sector.

    But first it’s useful to understand our approach to determining if the ATO needs to intervene, how we will intervene and when we need to impose penalties. To this end we have created an SMSF risk-management framework to determine our actions. This is about helping trustees to comply with their SIS Act and income tax obligations so our primary focus is on awareness, education and support. We rely heavily on SMSF professionals to assist us in this and we work closely with associations such as the Tax Institute to engage and support professionals in their role and to educate clients.

    Obviously some trustees make mistakes or struggle to comply and therefore the annual independent audit of SMSFs is a key integrity check. We review and consider action on all reported contraventions. Our audits and reviews are aimed at ensuring a level playing field and we will take action against those who repeatedly have difficulty complying and those who intentionally fail to comply.

    We select SMSFs for audit and review using risk models, intelligence or referrals from other state or commonwealth departments and law enforcement agencies. We have two primary automated risk models:

    1. When an SMSF is established.
    2. When an SMSF is operating.

    Our risk-management efforts start as soon as an SMSF applies for registration. The SMSF establishment model focuses on the compliance history of the trustees/directors (eg if they have previously been part of another SMSF we had issues with), the individual’s debt and lodgment history, their superannuation balance and whether they are in receipt of commonwealth benefits. In this process, we approach trustees by telephone and ask them questions about key obligations and concepts (such as the sole-purpose test for example). Depending on their answers we may allow registration or put conditions in place.

    Once the SMSF is operating, a number of other risks become important. The risk model that we use for operating SMSFs looks at the income tax and regulatory history of the SMSF. For this we primarily use the SMSF annual return and auditor contravention report but we do have many other data sources. We rate over 40 different attributes, with the weighting of an attribute based on our experience when we’ve audited SMSFs in a similar situation. Basically, you can be assured that if we determine an SMSF is ‘high risk’ we’re doing so with a great degree of certainty, there is a high likelihood of a breach or breaches occurring and our penalty and enforcement powers will come into play.

    We also initiate investigations and audits based on intelligence and referral – this is a manual process. We get referrals from other federal and state government agencies, including law enforcement, and share intelligence across the ATO. Additionally, we receive ‘dob-ins’ from the general public and related parties of SMSF trustees and directors and we manually review alerts and information in databases like RP Data and AUSTRAC.

    Many SMSF professionals use the Super P2P service. We expect though that in most instances where a trustee or auditor identifies an issue or contravention, they can rectify it without ATO assistance; the auditor would likely report the contravention and the rectification and this would generally be enough to satisfy us. We encourage all trustees and their advisers to adopt this type of approach, ie to take steps to rectify a breach as soon as it is identified. In those circumstances, we’d be unlikely to apply further sanctions unless other factors are identified, such as if the same or similar contraventions frequently arose.

    SMSF enforcement outcomes 2014-15

    So now you know why we take action, I’d like to share the outcomes of our compliance action in 2014-15.

    • 361 accepted enforceable undertakings
    • 54 education directions given (new power)
    • 27 rectification directions given (new power)
    • 92 funds made non-compliant, with trustees receiving a notice of non-compliance
    • 662 disqualified trustees
    • 44 SMSFs wound-up due to compliance action.

    The new regime: overview

    You might note that in 2014-15 we started imposing our new compliance powers. There are three new compliance tools that we can use to treat contraventions that occurred on or after 1 July 2014 that I’d like to address. They are:

    • education directions
    • rectification directions
    • administrative penalties.

    Education directions

    When a contravention of the SIS Act or regulations occurs due to a lack of knowledge or understanding by the trustee, an education direction may be appropriate. It’s expected that a trustee who complies with an education direction will increase and refresh their knowledge of relevant super laws, reducing the likelihood of future contraventions. A trustee who receives an education direction would be required to complete an ATO-approved education course within a specified time period and provide us with a copy of the completion certificate.

    A trustee may be directed to undertake education in addition to other compliance action. For example they could be directed both to undertake education and to rectify the contravention, and potentially also have an administrative penalty imposed.

    Rectification directions

    Previously, rectification of contraventions commonly occurred with trustees initiating an enforceable undertaking with the ATO. The ATO has the option to accept or decline an enforceable undertaking. This process can often be inefficient and time-consuming.

    For contraventions of the SIS Act or regulations that occurred on or after 1 July 2014, the ATO can now direct the trustees to rectify a contravention with specified action and to provide the ATO with evidence of compliance with the direction. Rectification includes putting managerial or administrative arrangements in place that could reasonably be expected to ensure that there are no further contraventions of a similar kind. Generally, we allow six months to rectify an issue, but in limited circumstances a slightly longer period may apply.

    This doesn’t prevent the ATO considering whether to accept an enforceable undertaking from a trustee if offered. We still have the power to accept a court-enforceable undertaking from trustees of contravening funds. These arrangements rely on SMSF trustees initiating the undertaking with the ATO before we issue the rectification direction.

    So, when might we give a rectification direction? We may do so if we reasonably believe that a person who is a trustee or a director (of a body corporate that is a trustee) of an SMSF has contravened the SIS Act or regulations in relation to the fund.

    When considering whether to issue a direction, we take into account:

    • any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction
    • the nature and seriousness of the contravention
    • any other relevant circumstances.

    Failure to comply

    If the trustee fails to comply with the rectification direction within the specified period, then they have committed an offence of strict liability and are liable for a penalty of $1,800 (10 penalty unitsFootnote1). The trustee or director may also be disqualified or issued with a notice of non-compliance; this may result in a significant tax penalty on the SMSF.

    A trustee may request the terms of the rectification direction be varied, for example more time to complete the rectification. Any request to vary the rectification direction must:

    • be made in writing
    • be received on or before the end of the period specified
    • be signed and dated
    • set out the reasons for making the request.

    The ATO must make a decision on the request within 28 days or they will be taken to have refused the request.

    The trustee may object to the ATO decision to:

    • give a rectification direction, or
    • refuse to vary a rectification direction.

    Administrative penalties

    Where a trustee contravenes a specific provision of the SIS Act, an administrative penalty will automatically be imposed, as set out in s166 of the SIS Act. Examples include, but are not limited to:

    • 60 penalty units for breaching  
      • the lending rules
      • the borrowing rules, or
      • the in-house asset rules
    • 20 penalty units for breaching operating standards
    • 10 penalty units for:  
      • not keeping proper minutes and records, and
      • failing to keep proper records of or informing the regulator of changes in trustees/directors
    • 5 penalty units for failure to comply with an education direction.

    From 31 July 2015, the Commonwealth penalty unit increased from $170 to $180. This will apply to offences occurring after this date, therefore an administrative penalty of 60 penalty units will increase from $10,200 to $10,800 if the contravention occurred from 31 July 2015. The penalty unit will be indexed every three years with the Consumer Price Index, effective 1 July 2018. In the case of contraventions by a corporate trustee of an SMSF, the directors are jointly and severally liable for the one administrative penalty imposed whereas individuals will each receive a separate administrative penalty.

    Who the penalty is imposed on

    Let’s look at an example where the lending rules, in accordance with section 65(1) of the SIS Act, have been contravened. Where the trustee is a body corporate, the directors of that body corporate are jointly and severally liable to pay the penalty. This means the ATO may collect the entire penalty from any one of the directors of the corporate trustee or from all directors in various amounts, until the penalty is paid in full.

    In the case of individual trustees, each trustee is required to pay the full amount of the penalty. This means where an SMSF with four individual trustees has breached the lending rules, before 31 July 2015, all four trustees are each liable to pay a $10,200 penalty. 

    Where there is more than one trustee, it’s expected each trustee will have the penalty imposed on them individually unless there are exceptional circumstances supporting the imposition on specific trustees only. The burden will be on the trustee to prove, for example that another trustee committed fraud against them.

    When considering remission

    Each case is different and will be considered in light of the full range of compliance treatments available. When considering remission, we will take into account:

    • compliance history
    • rectification action
    • any other relevant circumstances.

    Trustees may object to our decision not to remit or not to remit in full the administrative penalty. It is unlikely that a trustee will be given more than one penalty remission as multiple breaches demonstrate poor compliance history.

    As we can only apply the penalties for breaches made on or after 1 July 2014, only a limited number of cases have so far warranted the use of our new directions and SMSF administrative penalty powers. So far, in all cases relating to the SMSF administrative penalties we have either remitted the penalty or are considering a remission request. However, as we audit more SMSFs for breaches made since 1 July 2014, you can expect to see increasing application of SMSF administrative penalties over the next 18 months, with requests for remission being denied in instances of serious and/or repeated non-compliance.

    Our approach to the new powers

    So, what is our approach to the new powers? We use the new powers and penalties to drive compliance, not to increase revenue; we want trustees help to avoid us having to take stronger actions. So while you can expect to see us actively using the directions powers, in a large percentage of cases our application of SMSF administrative penalties will be more judicious, via favourable remission requests, for first offences.

    Education directions may be appropriate when the contravention appears to have occurred due to a lack of understanding. A trustee who continues to breach regulatory requirements after being issued with an education direction will face stronger enforcement action, including non-remission of administrative penalties and, in cases of serious non-compliance, possible disqualification as a trustee and/or the fund being made non-complying.

    Rectification directions allow us to direct a trustee to rectify a contravention and put into place administrative arrangements that will ensure no repeat contraventions. As with education directions, trustees will need to provide evidence of their rectification within the timeframe specified, generally six months. Practically, it may be more beneficial for a trustee to propose an enforceable undertaking instead of waiting for us to issue a rectification direction.

    Administrative penalties apply where it is identified by the Commissioner that a trustee has contravened a specific SIS Act provision. The Commissioner has the discretion to remit penalties in part or in full. The circumstances where we will not remit administrative penalties include the more serious cases, for example where we see indicators of ongoing non-compliance or an unwillingness to recognise the issue and engage with us or if we have remitted a penalty previously.

    Where we have not remitted an administrative penalty, the trustee can seek a review of our decision. Obviously, in these cases we will apply similar tests regarding the seriousness of the contravention, repeated non-compliance, lack of engagement and unwillingness to take appropriate and timely action.

    The best way to avoid the more serious outcomes is to ensure you are compliant, and if you do identify a failure – take early action. Engage with us, work with professionals to rectify and put processes in place to ensure future compliance.

    Just a last note on administrative penalties, I want to remind you that we need to confirm a contravention before we apply a penalty. We don’t intend to automatically apply penalties to all contraventions reported to us. We must impose the SMSF administrative penalty when we confirm an eligible breach during an ATO audit, so it’s best to avoid the audit by taking steps to rectify the breach before we get involved. Also please note that the penalties are levied on the trustees and can’t be paid from fund holdings; this would be a very serious contravention in itself.

    To illustrate how the new regime will operate and interact with our existing powers I’m going to use a case study approach to take you through some scenarios which will spell out the consequences for trustees who do the wrong thing (deliberately or otherwise), demonstrate how these consequences may be mitigated when trustees work with us and show the kinds of factors that may result in one enforcement power being used over another.

    Before I start I want to emphasise that the sole purpose of an SMSF is to provide retirement benefits for members. Those people looking to ‘play the system’ and receive a present-day tax benefit in their personal or business affairs are on notice; regulatory and income tax breaches related to the same transaction or arrangement will no longer be treated in isolation. If we find an aggressive taxation approach coupled with a regulatory breach we will definitely look to disqualify the trustee.

    I’ll take you through some case studies now.

    Case studies

    Case study one

    The ABC Super Fund is a regulated SMSF established on 1 May 2014. The trustee is a body corporate with two directors. The sole member of the fund is Alfred Clark. The SMSF auditor lodged an ACR for the 2014-15 income year for a loan to the member for $30,000.The fund has no other contraventions reported and no outstanding reporting obligations. The total value of the fund’s assets is $750,000, consisting of shares, business real property and cash. No undertaking has been proposed by the directors to rectify the contravention.

    The directors advised the active compliance officer that: the loan was made to finance cash- flow difficulties in the member’s business; they thought they could lend money to a member provided it was repaid within a reasonable timeframe; there was no loan agreement in place, and no repayments have been made. The trustee has contravened subsection 65(1) in the 2014-15 income year.

    As the contravention occurred after 1 July 2014, an education direction, for both directors, may be considered because: they displayed a lack of knowledge and understanding of their obligations which contributed to them contravening the SISA and there is no history of prior contraventions.

    It may also be appropriate to direct the trustee to rectify if the contravention remains unrectified following the commencement of the audit because: it’s a serious contravention in that it is a civil penalty provision; the assets of the fund are at risk (the value of the loan to the total asset value of the fund is 4%); by complying with a rectification direction the fund will not suffer any financial detriment; and the trustee hasn’t proposed any undertaking to rectify the contravention.

    The contravention occurred in the 2014-15 income year, so under subsection 166(1), the body corporate is liable for an administrative penalty of $10,200 (60 penalty unitsFootnote2). The directors of the body corporate are jointly and severally liable to pay the penalty.

    If the contravention is rectified, or plans are put in place to rectify, prior to or soon after the audit commencing, we would consider remitting the administrative penalty. However, remission would be unlikely if the contravention remains unrectified and the Commissioner is required to make a rectification direction. The directors will be jointly and severally liable to pay a $10,200 penalty for contravening subsection 65(1).

    Case study two

    The DEF Super Fund is a regulated SMSF established on 4 March 2012. The trustee is a body corporate with two directors: Andrew and Patricia Jones. They are both members of the fund. In the 2012-13 income year, the fund was audited by us following lodgment of an ACR which reported that the fund loaned $31,236 to Mr Jones.

    The directors were informed about their roles and responsibilities during the audit. They were advised that the fund is not permitted to loan money to a member or a relative of a member. We agreed to the enforceable undertaking proposed by the directors to rectify the contraventions. The enforceable undertaking was complied with.

    In the 2014-15 income year, the fund is being audited following a new ACR which reported the fund loaned $21,598 to Mr Jones to buy a car. Mr Jones has not repaid the loan nor has the corporate trustee taken any steps to recover the loan. This new transaction occurred after the ATO’s previous audit and agreement to an enforceable undertaking.

    . In the 2014-15 income year the trustee has contravened subsection 65(1) again.

    An education direction isn’t appropriate because the directors were aware that loans to members are prohibited. Undertaking education is unlikely to have any positive influence on the directors’ future behaviour as they were already been made well aware of their obligations during the first audit.

    As the contravention occurred after 1 July 2014, a rectification direction may be considered.

    Under subsection 166(1), the body corporate is liable for administrative penalties of $10,200 (60 penalty units) for contravening subsection 65(1). The body corporate is therefore liable to pay an administrative penalty of $10,200Footnote3.

    Generally where trustees have contravened the SIS Act and have not taken steps to rectify a contravention the penalty won’t be remitted.

    In this case, further remission of the penalty is extremely unlikely because the contravention has not been rectified, the trustee has a poor compliance history, and this is not the first time that the trustee has contravened subsection 65(1). The directors are jointly and severally liable to pay a $10,200 administrative penalty. Serious contemplation, with regard to specific facts and circumstances, would also be given to the disqualification of the trustee as they have a history of breaching regulatory requirements and had not rectified before the ATO was again involved.

    Note that in the event of trustee disqualification, the SMSF will either need to be converted to a small APRA-regulated fund by appointing an APRA-licensed trustee or the member will need to exit the SMSF. Converting to a small APRA fund has additional costs and finding a trustee willing to take on the responsibility will likely be difficult. It’s more likely the member or member(s) will need to roll out their benefits to a large super fund. This will mean associated assets will need to be liquidated into cash which could cause financial loss. It’s not possible to appoint a legal personal representative for a disqualified SMSF trustee.

    The disqualification of a trustee has significant financial consequences as well as taking away the individual’s ability to directly control their super monies. While not as serious as the SMSF being made non-complying it is an outcome to be avoided. In this case study the trustee’s continued poor behaviour puts them at serious risk of being disqualified if they are unable to demonstrate underlying circumstances and reasons for us not to take this action. The ATO does not have endless patience and if your client received a lesser penalty the first time the ATO intervened they should be well aware this is may be their last opportunity to comply before disqualification action is taken.

    Case study three

    Jeremy Culpeper and Vivian Culpeper are the trustees for the Southern Super Fund, a regulated SMSF established on 4 January 2012. The fund’s total assets at 30 June 2014 are $800,000. The fund lodged all SMSF annual returns on time and has no previous contraventions reported.

    On 1 September 2013, the fund lent $200,000 to a related company. The loan is an IHA and the fund’s market value ratio exceeds 5% of the total assets of the fund at the end of the 2013-14 year. The trustee has contravened subsection 84(1). As the contravention occurred before 1 July 2014, an education direction can’t be considered. Similarly, a rectification direction can’t be considered, nor can an administrative penalty be imposed.

    The trustees would be expected to rectify the transaction and/or propose a rectification via an enforceable undertaking. Failure to do so may see the trustees disqualified.

    Case study four

    The Northern Super Fund, a regulated SMSF was established on 4 May 2011. John and Martha are members of this SMSF. The trustee is Vineyard Video Pty Ltd with John and Martha as directors. The fund's total assets as at 30 June 2014 are $400,000. The fund lodged all SMSF annual returns on time with no prior contraventions reported.

    The 2014-15 SMSF annual return was due on 28 February 2016. An ATO audit of the 2014-15 income year starts on 1 April 2017 as the SMSF annual return has still not been lodged and no extension to lodge has been requested.

    The directors admit to the ATO case officer that they haven’t lodged because they’re behind in the administration of the SMSF. For the 2014-15 income year, it’s found that the trustee has failed to: prepare the accounts and statements of the fund; appoint an approved SMSF auditor within the prescribed timeframe, and lodge the SMSF annual return.

    Accordingly, in the 2014-15 income year the trustee has contravened sections 35B, 35C and 35D of the SIS Act. As the contravention occurred after 1 July 2014, an education direction can be considered. Although an education direction may not be the most appropriate tool in this instance, as the trustee has lodged all previous annual returns on time, it appears that the trustee has knowledge of and is aware of the requirements.

    It may be appropriate to issue a rectification notice to prepare the accounts and statements for the 2014-15 income year, to provide the accounts and statements to an SMSF auditor and to lodge the 2014-15 SMSF annual return.

    Under subsection 166(1), the body corporate is liable for administrative penalties of $1,700 (10 penalty unitsFootnote4) for contravening section 35B. Additionally the trustee is also liable for a failure to lodge penalty.

    The trustee has lodged all other SMSF annual returns on time and has no prior contraventions. This is a first contravention and may warrant full remission of the administrative penalty.

    These case studies highlight how the new penalties give the ATO scope to avoid disqualifying trustees and making the SMSF non-complying however they should be viewed as one step on a path to that outcome if the trustees continue with what we consider unacceptable behaviour. We know people make mistakes; the quick rectification of these mistakes goes a long way towards trustees being able to continue to operate their own super fund without too strong a financial penalty or even stronger enforcement action by way of trustee disqualification or the making of the fund non-complying.


    The key point I’d like to conclude with today is that prevention is always better than cure. And I mean prevention in the broadest sense – both in respect to education (and as you know we’ve been running an SMSF education campaign for some time now) but also in terms of taking action at the earliest possible stage to get things back on track if things go wrong.

    Trustees and their advisers who are concerned about a potential contravention by their fund or non-compliance with their obligations are encouraged to take steps to rectify any issues at the earliest possible stage. Taking early and immediate steps to rectify issues not only serves to limit or prevent financial detriment to a members’ retirement savings, but is also likely to lead to a more favourable outcome in terms of any enforcement action by the ATO.

    Footnote 1

    1A penalty unit increased from $170 to $180 for offences occurring on or after 31 July 2015. For all offences occurring before 31 July 2015 a penalty unit is $170.


    Return to footnote 1 referrer

    Footnote 2

    As the contravention occurred before 31 July 2015 a penalty unit is worth $170.


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    Footnote 3

    As the offences occurred before 31 July 2015, a penalty unit is worth $170.


    Return to footnote 3 referrer

    Footnote 4
    As the offences occurred before 31 July 2015, a penalty unit is worth $170.

    Return to footnote 4 referrer

    Last modified: 04 Sep 2015QC 46802