SMSF – Avoiding Penalties

The penalty regime for self-managed superannuation funds (SMSFs) under the Australian Taxation Office (ATO) has been in place for a year. The ATO powers were set up to give the tax regulator additional flexibility to administer penalties that reflect the severity of a breach.

Administrative penalties administered by the ATO are based on a sliding scale. For example, failure to prepare financial accounts and keep records will incur 10 penalty units, while not adhering to investment rules will incur 60 penalty units.

Trustees will now face increased penalty units, according to ATO director in superannuation Mary Simmons. From 31 July, penalty rates increased from $170 to $180 per unit, and this rate applies to all contraventions that take place after that date. Therefore, the cost for not complying with investment rules will increase from $10,200 to $10,800.

Speaking at a recent SMSF Association Technical Conference, Simmons made it clear that the ATO will continue to “support SMSF trustees in making them aware of their responsibilities”. “Sometimes, mistakes will happen. It’s not about taking a harsh approach, it is about working with trustees who are willing participants when a breach has occurred,” Simmons said.

In the 2014/15 year, the ATO disqualified 660 trustees, issued 92 notices of non-compliance and wound up 44 self-managed superannuation funds because of the contraventions under the new penalty regime. One of the most common traps was in relation to pension payments.

“The big issue that we’re seeing now in meeting the minimum pension requirements is around liquidity,” Simmons said. In particular, the role of property when making pension payments. “The biggest issue we’re finding is when real property is the major asset of the fund,” she said.

Simmons emphasised that the ATO does not make a judgement about whether a fund makes a good or bad investment. Rather, the issue is about having a sufficient amount of liquid assets.

Simmons said the ATO was concerned with funds that have moved into pension phase but had not adjusted their investment strategy to take into account the liquidity that was required to make ongoing pension payments. “We are finding in a lot of cases that the net return on a rental property is not enough to cover the pension,” she said.

Another “simple mistake” was not valuing assets properly according to market value. Simmons said trustees need to ensure that as their pension drawdown increases, they may need to revise their investment strategy, otherwise, the problems will become more serious.