House of Representatives

Tax and Superannuation Laws Amendment (2014 Measures No. 1) Bill 2014

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Administrative directions and penalties for contraventions relating to self managed superannuation funds

Outline of chapter

2.1 Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to self managed superannuation funds (SMSFs) including:

rectification directions;
education directions; and
administrative penalties.

2.2 All references in this chapter are to the Superannuation Industry (Supervision) Act 1993 (SIS Act) unless otherwise indicated.

Context of amendments

2.3 SMSFs are a type of superannuation fund where membership is restricted to a maximum of four members and all members must be trustees or directors of the corporate trustee.

2.4 The number of SMSFs in Australia has increased over time, from approximately 375,000 in June 2008 to 510,000 in June 2013. Although most SMSF trustees seek to operate their funds properly to secure their own retirement, in an industry of this size there will be a proportion of SMSFs that disregard the rules.

2.5 The Commissioner of Taxation (Commissioner) is responsible for the regulation of SMSFs (Regulator). The Regulator needs to have and apply effective, flexible and proportionate powers to address non-compliance with superannuation laws.

2.6 Currently, the Regulator has a limited number of tools available to deter and address instances of non-compliance including:

making an SMSF non-complying for taxation purposes;
applying to a court for civil penalties to be imposed. A person may also face criminal penalties for more serious breaches of the law;
accepting an enforceable undertaking in relation to a contravention; and
disqualifying a trustee of an SMSF.

2.7 Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high. The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

2.8 The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected. This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct.

2.9 The power to give directions and impose administrative penalties for contraventions of the SIS Act will provide the Regulator with additional tools, both educational and punitive, in conjunction with his existing powers. These tools will be effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach, and will support the ongoing integrity of the system.

2.10 Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to SMSFs, which will form an integral part of the suite of options available to the Regulator to respond to non-compliance with the law. This measure was previously introduced as Schedule 3 to the Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 and implements recommendations 8.2 to 8.4 of the Super System Review .

Summary of new law

2.11 Schedule 2 to this Bill introduces administrative directions and penalties for contraventions relating to SMSFs including:

giving the Regulator the power to give rectification directions and education directions; and
imposing administrative penalties for certain contraventions of the superannuation law.

2.12 The amendments in Schedule 2 provide the Regulator with the ability to give a rectification direction or an education direction where it reasonably believes that a trustee or director of a corporate trustee of an SMSF has contravened a provision of the SIS Act or Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations).

2.13 A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time frame and provide the Regulator with evidence of the person's compliance with the direction.

2.14 An education direction will require a person to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course. Trustees and directors of corporate trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as a trustee (or director of a corporate trustee) of an SMSF.

2.15 The Regulator may approve courses of education for the purposes of the education direction. A fee must not be charged for an approved course, undertaken in compliance with an education direction.

2.16 A person will be liable to an administrative penalty if certain provisions of the SIS Act are contravened in relation to an SMSF. The amount of the penalty is an amount specified in the law.

2.17 An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed.

Comparison of key features of new law and current law

New law Current law
A rectification direction is a written direction requiring a person to take specified action to rectify the contravention and provide the Regulator with evidence of the person's compliance with the direction.

A rectification direction may be given to a person where the Regulator reasonably believes that person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund, having regard to any financial detriment to be suffered by the fund as a result of the person's compliance with the direction, and the nature and seriousness of the person's contravention.

A rectification direction must not be given to a person in relation to a contravention if the Regulator has accepted an undertaking by any person under section 262A of the SIS Act in relation to the contravention and the undertaking has neither been withdrawn nor varied such that the contravention is no longer covered by it.

The rectification direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

No equivalent.

An education direction is a written direction requiring a person to undertake a specified course of education and to provide the Regulator with evidence of completion of the course.

An education direction may be given to a person where the Regulator reasonably believes a person has contravened a provision of the SIS Act or SIS Regulations in relation to the fund.

The education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances.

The Regulator may approve a course, in writing, for the purpose of giving education directions. A fee must not be charged for the course undertaken in compliance with an education direction.

No equivalent.

The Regulator may at any time, vary or revoke a rectification direction or an education direction by giving written notice to the person to whom the direction was given. No equivalent.
A person to whom a rectification direction or education direction is given may request the Regulator to vary the direction. The Regulator must make a decision within 28 days, or the Regulator is taken to have refused the request. No equivalent.
If a person contravenes a section of the SIS Act specified in the table in section 166, the person is liable to an administrative penalty.

An administrative penalty must not be paid or reimbursed from the assets of the SMSF.

No equivalent.

Detailed explanation of new law

2.18 The Commissioner has general administration of Part 20: Administrative directions and penalties for contraventions relating to SMSFs. [Schedule 2, item 1, section 4; item 2, subparagraph 6(1)(e)(vii)]

Definitions

2.19 The definitions of 'education direction' and 'rectification direction' are added to the SIS Act dictionary. [Schedule 2, item 3, subsection 10(1)]

2.20 For the purposes of the new administrative directions and penalties for contraventions relating to SMSFs, a superannuation fund is treated as an SMSF if it has ceased being a SMSF for the purposes of the rest of the SIS Act and the trustee of the fund is not a registrable superannuation entity licensee. Administrative directions and penalties remedies may be imposed on trustees and directors of corporate trustees of funds that do not meet the definition of an SMSF in section 17A of the SIS Act, but are nonetheless treated as an SMSF and remain regulated by the Commissioner. This will ensure that trustees and directors who contravene the SIS Act or SIS Regulations do not escape any sanction due to the fund no longer meeting the definition of an SMSF under section 17A of the SIS Act. [Schedule 2, item 4, subsection 10(4)]

2.21 Administrative penalties are imposed for contraventions of specified provisions of the SIS Act. Notes have been added to each provision to explain that the Act imposes an administrative penalty for contraventions of the relevant provisions in relation to an SMSF. [Schedule 2, items 5 to 7, 9 to 14, 17 to 21, and 23 to 25, subsections 34(1) and 35B(6), section 35B, subsections 65(1), 67(1) and 84(1), section 103, subsections 104(1), 104A(2), 105(1), 106(1), 106A(1), 124(1), 254(1) and 347A(5)]

Indemnification from assets of the SMSF

2.22 A provision in the governing rules of an SMSF is void in so far as it would have the effect of exempting a trustee of the SMSF from, or indemnifying a trustee or a director of the trustee of the SMSF against:

liability for the costs of undertaking a course of education in compliance with an education direction; or
liability for an administrative penalty imposed by the new administrative penalty regime.

[Schedule 2, item 8, paragraphs 56(2)(d) and (e) and 57(2)(d) and (e)]

2.23 It is intended that any associated costs that may be incurred as a result of an education direction or a liability under the new administrative penalty regime are payable personally by the person to whom the direction is issued or who has committed the breach, and will not be paid or reimbursed from assets of the SMSF.

Trustee declaration

2.24 A trustee or a director of a corporate trustee of an SMSF who undertakes a course of education in compliance with an education direction is required to sign a declaration that he or she understands his or her duties as a trustee of a SMSF (or as director of a body corporate that is such a trustee) no later than 21 days after completing the course of education. [Schedule 2, items 15 and 16, paragraphs 104A(1)(c) and 104A(2)(ba)]

2.25 It is intended that trustees and directors of a corporate trustee who undertake a course of education in compliance with an education direction will gain a better understanding of their obligations and responsibilities as trustees and will be less likely to contravene the law again in future.

2.26 These trustees and directors will be required to confirm that they understand their obligations and responsibilities as trustees or directors of a corporate trustee by signing a declaration to that effect.

2.27 Trustees and directors who fail to sign the declaration in accordance with section 104A will be liable to an administrative penalty.

Administrative directions and penalties for contraventions relating to SMSFs

2.28 This Bill inserts a new Part into the SIS Act relating to administrative directions and penalties for contraventions relating to SMSFs. [Schedule 2, item 22, Part 20]

Object and scope of administrative directions and penalties

2.29 The object of the new regime is to provide administrative directions and penalties for contraventions of the SIS Act or the SIS Regulations that relate to SMSFs. The new regime:

gives the Regulator power to give rectification directions and education directions; and
imposes administrative penalties for certain contraventions of the SIS Act.

[Schedule 2, item 22, section 157]

2.30 The new regime only applies to SMSFs that are regulated superannuation funds. 'Regulated superannuation fund' is defined in section 19. [Schedule 2, item 22, section 158]

Directions

Rectification directions

2.31 Currently, rectification of contraventions commonly occurs through the enforceable undertaking process under section 262A of the SIS Act. Enforceable undertakings rely on a person initiating the enforceable undertaking with the Regulator. The Regulator then has the ability to accept or decline the enforceable undertaking that has been offered. If accepted and not complied with, the Regulator must apply to the Court to have it enforced.

2.32 A rectification direction may be given if the Regulator reasonably believes 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 (other than Part 3B which relates to superannuation data and payment standards) or the SIS Regulations in relation to the fund. [Schedule 2, item 22, subsection 159(1)]

2.33 Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs. Additionally, certain provisions in the SIS Act, for example section 104A (about trustee declarations), or the SIS Regulations may apply directly to directors of body corporates that are trustees of SMSFs. A trustee or director who does not adhere to these provisions and contravenes the Act may be given a rectification direction.

2.34 A rectification direction may therefore be given to:

an individual trustee of an SMSF that has contravened the SIS Act or SIS Regulations;
a body corporate that is the trustee of an SMSF that has contravened the SIS Act or SIS Regulations; or
a director of a body corporate trustee of an SMSF who has contravened the SIS Act or SIS Regulations.

2.35 The Regulator may give a person a rectification direction requiring the person to take a specified action to rectify the contravention and to provide the Regulator with evidence of the person's compliance with the direction. [Schedule 2, item 22, subsection 159(2)]

2.36 The term 'rectify' is defined in subsection 10(1) of the SIS Act and will generally involve putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.

2.37 Some contraventions only occur in the year of income a particular transaction took place. However, certain transactions, if not rectified, may cause trustees to contravene the SIS Act or SIS Regulations over a number of income years. For example:

section 67 of the SIS Act prohibits an SMSF trustee from borrowing money or maintaining an existing borrowing of money except in limited circumstances. Trustees may contravene this provision in:

-
the year of income that the borrowing is undertaken (this will result in a contravention of paragraph 67(1)(a)); and
-
each year of income the borrowing is maintained (this will result in contraventions of paragraph 67(1)(b)).

In these circumstances, it may be appropriate for the Regulator to give a rectification direction to the trustee of the SMSF specifying that the trustee must ensure that the borrowing is paid off over a specified period of time. Such action will ensure that the trustee does not continue to maintain a borrowing in contravention of paragraph 67(1)(b).
where the market value of a fund's in-house assets exceeds five per cent at the end of an income year, subsection 82(1) requires the trustees of a fund to prepare a written plan before the end of the following income year that sets out:

-
the amount by which the market value ratio of the fund's in-house assets exceeds 5 per cent; and
-
the steps that the trustees will take to ensure that in-house assets are disposed of and that the value of those assets disposed of will return the fund to a market value ratio of five per cent or less.

If the Regulator determines that the trustees have not carried out the steps of the plan they prepared within the relevant time period, the Regulator may issue a direction to dispose of assets in accordance with the plan prepared by the trustees.

2.38 In deciding whether to give a person a rectification direction, the Regulator should have regard to:

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 person's contravention; and
any other relevant circumstances.

These factors do not limit the matters that the Regulator may have regard to in determining whether to issue a rectification direction. [Schedule 2, item 22, subsection 159(3)]

2.39 The Regulator is required to have regard to any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person's compliance with the rectification direction. This includes consideration of the significance of the financial detriment, for example, whether issuing a rectification direction will have a major impact on the retirement savings of the members of the fund, and whether there are other compliance mechanisms that might be more appropriate in the circumstances. [Schedule 2, item 22, paragraph 159(3)(a)]

2.40 In deciding to give a person a rectification direction, the Regulator is to also have regard to the nature and seriousness of the person's contravention. [Schedule 2, item 22, paragraph 159(3)(b)]

2.41 The nature and seriousness of a contravention will always be a question of fact and degree and each case will need to be considered in light of its particular circumstances. The Regulator should consider all the facts relating to the contravention including but not limited to:

the provision contravened and the nature of the contravention;
the behaviour and circumstances of the person who contravened the Act, including the past compliance history; and
the value of the assets involved.

2.42 In considering all the relevant facts, the Regulator may determine that a rectification direction is not the appropriate action. The Regulator may consider that another action, such as issuing a notice of non-compliance under section 40 of the SIS Act, is more appropriate.

2.43 A rectification direction must specify the period within which the person must comply with the direction, which must be reasonable in the circumstances. [Schedule 2, item 22, subsection 159(4)]

2.44 In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

the type of action specified in the direction; and
the circumstances of the person to whom the direction is issued.

2.45 The Regulator must not give a rectification direction in relation to a particular contravention if the Regulator has accepted an enforceable undertaking given by a person in relation to the contravention, the contravention is covered by that undertaking and the undertaking has neither been withdrawn nor varied in a way that means the contravention is no longer covered by it. [Schedule 2, item 22, subsection 159(5)]

2.46 The introduction of rectification directions does not affect the operation of enforceable undertakings under section 262A. However, if an enforceable undertaking has been accepted by the Regulator in relation to a contravention, the Regulator cannot subsequently issue a rectification direction in relation to that same contravention unless the undertaking has been withdrawn or varied in a way that means the contravention is no longer covered by the undertaking.

2.47 A person to whom a rectification direction is given must comply with the direction before the end of the period specified in the direction. If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units. [Schedule 2, item 22, subsections 159(6) and (7)]

2.48 Making a failure to comply with a rectification direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime.

2.49 'Strict liability' is defined in section 6.1 of the Criminal Code Act 1995 . The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence. This is designed to discourage careless non-compliance. Additionally, the penalty is less than 60 penalty units and does not include imprisonment.

2.50 The Regulator is not prevented from giving a rectification direction in relation to a contravention even if an administrative penalty also applies in relation to a particular contravention under the administrative penalty regime.

2.51 Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving an education direction or issuing a notice of non-compliance, if the rectification direction is not complied with.

Education directions

2.52 An education direction may be given to:

a trustee of an SMSF, if the Regulator reasonably believes that the trustee has contravened a provision of the SIS Act (other than Part 3B which relates to superannuation data and payment standards) or the SIS Regulations in relation to the fund; or
a director of a body corporate that is trustee of an SMSF if the Regulator reasonably believes that:

-
the director has contravened a provision of the SIS Act (other than Part 3B) or the SIS Regulations in relation to the fund; or
-
the trustee which is a body corporate has contravened a provision of the SIS Act (other than Part 3B) or the SIS Regulations in relation to the fund.

[Schedule 2, item 22, subsection 160(1)]

2.53 Provisions contained in the SIS Act and SIS Regulations must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs. Additionally, certain provisions in the SIS Act or SIS Regulations may apply directly to directors of a body corporate that is the trustee of an SMSF. A trustee or director who does not adhere to these provisions and contravenes the Act may be given an education direction.

2.54 The Regulator may give a person an education direction requiring the person to undertake a specified approved course of education and provide the Regulator with evidence of completion of the course. [Schedule 2, item 22, subsection 160(2)]

2.55 It would be appropriate for the Regulator to issue an education direction to a person where the person's lack of knowledge or understanding of their obligations has contributed to a contravention of the SIS Act or the SIS Regulations.

2.56 It is intended that an approved course of education will provide trustees and directors with appropriate knowledge relating to the contravention that has occurred. It will also provide an opportunity for trustees and directors to improve and refresh their overall knowledge of relevant superannuation laws and should reduce the likelihood of trustees and directors committing contraventions in the future.

2.57 An education direction must specify the period within which the person must comply with the direction, which must be a period that is reasonable in the circumstances. [Schedule 2, item 22, subsection 160(3)]

2.58 In determining the period of time to specify in the direction, the Regulator should have regard to factors including, but not limited to:

the nature of the education course specified in the direction; and
the circumstances of the person to whom the direction is issued.

2.59 A person to whom an education direction is given must comply with the direction before the end of the specified period. If the person fails to comply with the direction within that period, the person commits an offence of strict liability and is liable for a maximum of 10 penalty units. [Schedule 2, item 22, subsections 160(4) and (5)]

2.60 Making a failure to comply with an education direction an offence of strict liability is consistent with offences relating to the contravention of other regulatory provisions contained in the SIS Act and SIS Regulations and is necessary to ensure the integrity of the regulatory regime.

2.61 'Strict liability' is defined in section 6.1 of the Criminal Code Act 1995 . The strict liability relates to the lack of action by a person to whom the direction was issued, and who is personally liable for the offence. This is designed to discourage careless non-compliance. Additionally, the penalty is less than 60 penalty units and does not include imprisonment.

2.62 The Regulator is not prevented from giving an education direction in relation to a contravention even if an administrative penalty is also imposed for that contravention under the administrative penalty regime.

2.63 Additionally, the Regulator is not prevented from imposing or applying for other sanctions for a contravention, such as giving a rectification direction or issuing a notice of non-compliance, if a contravention of the same kind occurs in the future.

Approval of courses of education

2.64 The Regulator may, in writing, approve one or more courses of education for the purpose of giving education directions. [Schedule 2, item 22, subsection 161(1)]

2.65 An approved course may be provided by the Regulator or another entity whose course has been approved by the Regulator. However, it must be a course for which no fees are charged in respect of persons who undertake the course. [Schedule 2, item 22, subsection 161(2)]

2.66 An approved course of education is intended to provide trustees and directors of a corporate trustee with knowledge relevant to their compliance obligations under SIS Act and SIS Regulations, and not to impose a monetary penalty. Other sanctions, such as administrative penalties imposed under the Act impose a monetary penalty for a contravention. It is therefore considered appropriate that trustees and directors of a corporate trustee should not be subject to fees from providers for undertaking an education course specified in the direction.

2.67 The amendments make it clear that an approval of an education course given by the Regulator is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 2, item 22, subsection 161(3)]

Costs of course of education

2.68 Trustees and directors may incur costs in complying with the education direction such as travel costs, costs incurred in notifying the Regulator that the education direction has been complied with and expenses related to using the internet if the course is undertaken on-line.

2.69 The amendments clarify that although an approved course must be a course for which no fees are charged, none of the costs that may be associated with undertaking the course may be paid or reimbursed from the assets of the fund in relation to which the education direction was given.

2.70 This is in keeping with the broad intention that costs incurred under the new administrative penalty regime are payable personally by the person who has committed the breach and not paid or reimbursed from assets of the SMSF. [Schedule 2, item 22, section 162]

Review rights

Variation or revocation on the Regulator's own initiative

2.71 The Regulator may, at any time, vary or revoke a rectification direction or an education direction by written notice given to the person to whom the direction was given. [Schedule 2, item 22, section 163]

2.72 The Regulator is not limited in when he or she may vary or revoke a rectification direction or an education direction. This provision is intended to give the Regulator flexibility in administering the law.

Variation on request

2.73 The amendments allow a person to whom rectification direction or an education direction is given, to request the Regulator to vary the direction. [Schedule 2, item 22, subsection 164(1)]

2.74 A request to vary a direction does not affect the ability of a person to object to the Regulator's decision to give or vary the direction.

2.75 A person may request the Regulator to vary the direction in any way. For example, the person may request a variation to the period specified in the notice if the person requires more time to undertake a course of education or take action to rectify a contravention.

2.76 The request must be made by written notice to the Regulator before the end of the period specified in the rectification direction or education direction within which the person must comply with the direction. [Schedule 2, item 22, subsection 164(2)]

2.77 A person cannot request the Regulator to vary the direction if the period specified in the rectification direction or education direction has passed.

2.78 The request must set out the reasons for making the request. This will assist the Regulator in making a decision on the request. [Schedule 2, item 22, subsection 164(3)]

2.79 The Regulator must decide whether to:

vary the direction in accordance with the request; or
vary the direction otherwise than in accordance with the request; or
refuse to vary the direction.

[Schedule 2, item 22, subsection 164(4)]

2.80 If the Regulator does not make a decision on the request before the end of the period of 28 days after the day on which the request was made, the Regulator is taken, at the end of that period to have refused the request. The time for compliance with the direction in this case will be affected by Regulator's written notification of the deemed decision. [Schedule 2, item 22, subsection 164(5)]

2.81 If the Regulator makes a decision within 28 days the Regulator must notify the person of his or her decision. If the decision is to vary the direction, the Regulator must give the person a copy of the varied direction. If the decision is to refuse to vary the direction, or to vary the direction otherwise than in accordance with the request, the Regulator must give the person written reasons for the decision. [Schedule 2, item 22, subsection 164(6)]

2.82 If a person makes a request to vary a direction, then the period specified in a rectification direction or an education direction within which the person must comply with the direction is extended by one day for each day in the period:

beginning at the start of the day on which the request was made; and
ending at the end of the day that the Regulator notifies the person of the decision that has been made on the request.

[Schedule 2, item 22, subsection 164(7)]

Example 2.1 : Request to vary a direction Liz and Aaron are members and individual trustees of Pink SMSF. The Commissioner issues Liz and Aaron with an education direction on 1 January 2014 that specifies the direction must be complied with by 30 June 2014.Liz and Aaron request on 5 May 2014 for the period specified in the direction to be extended to 31 December 2014. The Commissioner notifies Liz and Aaron on 31 May 2014 that the request to extend the period for compliance to 31 December 2014 has been refused and that the education direction must be complied with by 27 July 2014.

2.83 The Regulator does have the power to vary or revoke the direction on their own initiative if the Regulator considers that the period for compliance with the direction following the decision on the request is unreasonable in the circumstances.

Taxation objections

2.84 A person may object against a decision of the Regulator in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953) (about objections, review and appeals). [Schedule 2, item 22, section 165]

2.85 A person may lodge an objection if they are dissatisfied with a decision of the Regulator:

to give a rectification direction or education direction;
to refuse to vary a direction; or
to vary a direction otherwise than in accordance with a request.

2.86 The manner and timeframe within which an objection must be made is provided for in Part IVC of the TAA 1953.

Administrative penalties

2.87 If a person contravenes a specified provision of the SIS Act, the person is liable to an administrative penalty. The amount of the penalty is the amount specified in the table for the provision. [Schedule 2, item 22, subsection 166(1)]

2.88 An administrative penalty is not imposed for all contraventions of the SIS Act, only those included in a table in the Act. Additionally, administrative penalties are only imposed in relation to SMSFs.

2.89 Persons on whom an administrative penalty may be imposed on are:

a trustee of an SMSF (including an individual trustee or a corporate trustee); or
a director of a body corporate that is a trustee of an SMSF.

[Schedule 2, item 22, subsection 166(2)]

2.90 The specified provisions in relation to which an administrative penalty may be applied must be adhered to by all trustees (individual trustees and corporate trustees) of SMSFs. Additionally, certain provisions in the table apply directly to directors of body corporates that are trustees of SMSFs, for example, section 104A (about trustee declarations). A trustee or director who contravenes these provisions will be liable to an administrative penalty.

2.91 Collection and recovery of administrative penalties is dealt with in Part 4-15 in Schedule 1 to TAA 1953. Division 298 in Schedule 1 to the TAA 1953 provides machinery provisions for penalties. The term 'entity', used in Schedule 1 of the TAA 1953, is defined by section 960-100 of the Income Tax Assessment Act 1997 , which provides that 'entity' may refer to the different capacities in which a person does things. Subsection 166(3) clarifies that if a trustee of an SMSF on whom a penalty is imposed by section 166 is an individual, a reference in Part 4-15 of Schedule 1 or Division 298 in Schedule 1 to the TAA 1953 to an entity is taken to be a reference to that individual in their personal capacity. [Schedule 2, item 22, subsection 166(3)]

Administrative penalty and civil penalty

2.92 The Regulator may commence proceedings against a person for contravention of a civil penalty provision (Part 21 of the SIS Act). If an administrative penalty has been imposed for the contravention, then (whether or not the proceedings are withdrawn), the person is not liable to pay the administrative penalty. If an amount of the administrative penalty has been paid, then it is to be refunded or applied by the Regulator in total or partial discharge of another tax-related liability. [Schedule 2, item 22, section 167]

2.93 For the avoidance of doubt, section 8ZE of the TAA 1953 deals with the situation of a person against whom a criminal prosecution is instituted.

Penalty must not be reimbursed from the fund

2.94 An administrative penalty must not be paid or reimbursed from the assets of the fund in relation to which the administrative penalty was imposed. [Schedule 2, item 22, section 168]

2.95 Penalties imposed under the new administrative penalty regime are payable personally by the person who has committed the breach and therefore must not be paid or reimbursed from assets of the SMSF.

Joint and several liability of directors of corporate trustees

2.96 If a trustee that is a body corporate becomes liable to an administrative penalty, then the directors of that body corporate are jointly and severally liable to pay the amount of the penalty. [Schedule 2, item 22, section 169]

2.97 The power to control the management of a company, its property and affairs is vested collectively in the board of directors. Directors are therefore responsible for the actions of a corporate trustee, and it is appropriate that they are jointly and severally liable to an administrative penalty. This is consistent with the treatment of a corporate trustee of a SMSF in section 284-95 in Schedule 1 to the TAA 1953.

Example 2.2 : Corporate trustee that contravenes a provision Stuart and Alison are members and the directors of a body corporate that is the trustee of Green SMSF. Stuart and Alison fail to ensure that accounts and statements for Green SMSF are prepared for the 2014-15 year of income. As a result, the corporate trustee has contravened section 35B.An administrative penalty of 10 penalty units is imposed on the body corporate that is the trustee of the Green SMSF. Stuart and Alison as directors of the body corporate become jointly and severally liable to an administrative penalty of 10 penalty units imposed on the body corporate.

Example 2.3 : Individual trustees who contravene a provision Jill and Merryn are members and individual trustees of Yellow SMSF. Jill and Merryn fail to ensure that accounts and statements for Yellow SMSF are prepared for the 2014-15 year of income. As a result, each individual trustee has contravened section 35B.An administrative penalty of 10 penalty units is imposed on each individual trustee of Yellow SMSF in their personal capacity. Jill and Merryn are each liable to an administrative penalty of 10 penalty units.

Example 2.4 : Director of corporate trustee that contravenes a provision Marita and Peter become directors of a body corporate that is trustee of Blue SMSF. Peter fails to sign a trustee declaration and contravenes subsection 104A(2).An administrative penalty of 10 penalty units is imposed on Peter, as a director of the corporate trustee. Peter is liable to an administrative penalty of 10 penalty units.

Example 2.5 : Individual trustees that contravene a provision Cameron and Rohan are individual trustees of Red SMSF. Cameron fails to sign a trustee declaration and contravenes subsection 104A(2).An administrative penalty of 10 penalty units is imposed on Cameron in his personal capacity. Cameron is liable to an administrative penalty of 10 penalty units.

Taxation Administration Act 1953

2.98 The machinery provisions for penalties in Division 298 in Schedule 1 to the TAA 1953 will apply to an administrative penalty imposed by the SIS Act. [Schedule 2, item 26, Schedule 1, paragraph 298-5(d)]

2.99 The machinery provisions in Division 298 deal with:

how the Regulator must notify a person of their liability to an administrative penalty;
the due date for payment of the administrative penalty;
the ability of the Regulator to remit all or part of the administrative penalty;
objection, review and appeal rights; and
the imposition of the general interest charge on unpaid penalties.

2.100 A liability to an administrative penalty is a tax-related liability for the purposes of Subdivision 255-A in Schedule 1 to the TAA 1953 and can therefore be collected by the Commissioner like any other tax debt.

2.101 The general collection and recovery rules contained in Part 4-15 in Schedule 1 to the TAA 1953 will apply to administrative penalties.

Application and transitional provisions

2.102 The amendments made by Schedule 2 apply to contraventions that occur on or after 1 July 2014. [Schedule 2, item 27]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Administrative directions and penalties for contraventions relating to self managed superannuation funds

2.103 Schedule 2 to this Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

2.104 Schedule 2 to this Bill amends the Superannuation Industry (supervision) Act 1993 (SIS Act) to give the Commissioner of Taxation the power to issue directions and impose administrative penalties on trustees and directors of corporate trustees of self managed superannuation funds (SMSFs).

2.105 SMSFs are a type of superannuation fund where membership is restricted to a maximum of four members and all members must be trustees or directors of the corporate trustee.

2.106 The number of SMSFs in Australia has increased over time, from approximately 375,000 in June 2008 to 510,000 in June 2013. Although most SMSF trustees seek to operate their funds properly to secure their own retirement, in an industry of this size there will be a proportion of SMSFs that disregard the rules.

2.107 The Commissioner of Taxation (as Regulator) is responsible for the regulation of SMSFs. The Regulator needs to have and apply effective, flexible and proportionate powers to address non-compliance with superannuation laws.

2.108 Currently, the Regulator has a limited number of tools available to deter and address instances of non-compliance including:

making an SMSF non-complying for taxation purposes;
applying to a court for civil penalties to be imposed. A person may also face criminal penalties for more serious breaches of the law;
accepting an enforceable undertaking in relation to a contravention; and
disqualifying a trustee of an SMSF.

2.109 Applying current penalties can be costly and time-consuming and the potential consequences can be disproportionately high. The Regulator is unlikely to use his existing range of powers except in cases of significant non-compliance with the law.

2.110 The absence of graduated penalties results in a number of SMSF trustees avoiding sanction for contravening the law simply by rectifying the conduct when it is detected. This may be appropriate in certain circumstances, however, in order to encourage greater levels of voluntary compliance, it is not appropriate that trustees can continue to contravene the law and expect their actions to have no consequences because the available enforcement remedies are not proportional to the conduct.

2.111 The power to give directions and impose administrative penalties for contraventions of the SIS Act will provide the Regulator with additional tools, both educational and punitive, in conjunction with his existing powers. These tools will be effective, flexible and cost-effective mechanisms for imposing sanctions that reflect the nature and seriousness of the breach, and will support the ongoing integrity of the system.

2.112 An education direction will require a person to undertake a specified course of education within a specified time period that is reasonable in the circumstances. A rectification direction will require a person to undertake specified action to rectify a contravention of the superannuation law within a specified time period that is reasonable in the circumstances. A person commits an offence of strict liability if they do not comply with an education or rectification direction within the specified time period. The penalty is 10 penalty units. A person who is dissatisfied with a decision of the Regulator to issue a direction may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953 (TAA 1953), which provides the general framework for taxation objections.

2.113 A trustee or director of a corporate trustee is liable to an administrative penalty for the contravention of specified provisions in the SIS Act. The amount of the administrative penalty is specified in the law. Collection and recovery of administrative penalties is dealt with under the general framework contained in Part 4-15 of Schedule 1 to the TAA 1953.

Human rights implications

2.114 Schedule 2 to this Bill engages the right to be presumed innocent.

Presumption of innocence

2.115 Article 14(2) of the International Covenant on Civil and Political Rights protects the right of a person charged with a criminal offence 'to be presumed innocent until proved guilty according to law'.

2.116 The use of strict liability offences in respect of education and rectification directions in Schedule 2 to this Bill interacts with this presumption as there are no fault elements for any of the physical offences of a strict liability offence.

2.117 A strict liability offence is considered appropriate in the case of non-compliance with an education or rectification direction as the offence is regulatory and the regulatory supervision of SMSFs is compliance based. Further, the level of the penalty is at the lower end of the penalty scale and does not include imprisonment. The guidelines provided by the Criminal Justice Division of the Attorney-General's Department have been considered and applied in framing the offence.

Conclusion

2.118 This Schedule is compatible with human rights because to the extent that it engages right to be presumed innocent, any limitation on that right is reasonable, necessary and proportional to a legitimate aim of encouraging trustees and directors of corporate trustees of SMSFs to comply with their obligations under the superannuation law.


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