And SMSFs trustees should be ready for the shake-up.

 As discussed by Smart Investing last week – see Crackdown on wayward SMSF s – the Government intends to empower the tax office, as regulator of SMSFs, to directly issue fines to funds trustees who breach superannuation law.

The ATO will have the power from July next year – as proposed in new draft legislation – to issue a raft of fines intended to match the seriousness of the breaches.

And importantly, fund trustees will have to pay the fines personally and will not be allowed to withdraw the money from fund assets. Further, the tax office will gain the power to order trustees to rectify a breach to superannuation law – a power which it surprisingly doesn’t already possess. And the ATO will have the authority to order trustees to undergo special education.

Since the release of the draft legislation on August 20, SMSF specialists have been progressively issuing their commentaries on the proposed changes, underlining the significance of what is planned.

Meg Heffron, co-principal of SMSF administrator Heffron, writes in the latest Heffron Super News that the planned penalties will be “perhaps the most significant change” to self-managed super fund regulation since the tax office became regulator more than a decade ago.

What makes Heffron’s comment particularly telling is that she was a panel member of the Government’s superannuation review chaired by Jeremy Cooper.

The draft law is part of the Government’s Strong Super reform measures and flows from recommendations made by the Cooper review.

Heffron writes in her newsletter: “…there is currently no mechanism for the ATO to impose consequences on trustees that more appropriately ‘fit the crime’ when anything other than very serious breaches are involved.”

For very serious breaches, the tax office has the power to strip an SMSF of its complying status. This will result in the fund’s assets – less non-concessional contributions – being taxed at 45%. The Cooper review referred to this as the “nuclear option” because it is so devastating for a fund with up to almost half of a fund’s assets being eroded by tax.

Heffron says that for the tax office’s removal of a fund’s complying status is “obviously a very big call” and is unlikely to be used when a fund trustee “routinely commits small breaches”.

The existing law also allows the ATO to apply to a court for civil penalties and for the Director of Public Prosecutions to take criminal action. And the ATO can disqualify a fund trustee.

In other words, the current penalty regime available to the ATO tends to be costly, inflexible and, in most cases, devastating or disruptive to the retirement savings of fund members.

Peter Burgess, technical director of the SMSF Professionals’ Association of Australia (SPAA), is quoted in the online publication SmartCompany as saying: “The problem with the present penalty regime is that it is very hard for the ATO to take action against trustees who do the wrong thing.” (See SMSF crackdown: Seven key lessons for trustees)

Under the proposed changes, the tax office will take what was described in the Cooper review as a “speeding ticket” approach. The regulator will issue what are effectively de-merit points to fund trustees that will reflect the seriousness of an offence.

Each point is currently worth $110 in fines. And the greater the offence, the more points will be issued.As Burgess explains, the tax office will have the power to issue a maximum 60 points (leading to $6600 in penalties) for such breaches as lending money to fund members or their relatives.

A hierarchy of points will be issued for various offences ranging upwards from a minimum of five points (leading to $550 in penalties) for not providing the tax office with requested information.

Welcome to the new finely-tuned SMSF penalty regime. Don’t be caught speeding.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
30th August 2012