How the ATO determines SMSF Trustee Penalties

Compliance / Nov 24, 2020

How the ATO determines SMSF Trustee Penalties

Alex Polorotoff

by Alex Polorotoff

Last month, the ATO released internal staff guidelines known as Practice Statement Law Administration 2020/3, which provides guidance on penalties that can be imposed on SMSFs under the SIS Act.

The guidelines discuss how penalties are applied to corporate and individual trustees. As penalties cannot be paid using SMSF resources, the trustee is personally liable. For individual trustees, penalties apply to each individual, whilst directors of corporate trustees are jointly and severally liable, which can be a compelling reason to use a corporate trustee.

There is also guidance on dealing with multiple penalties relating to a single event. In these instances, they generally remit to a level reflecting the primary contravention. To illustrate this, the ATO provides the following examples:

Circumstances or event	Contravening provisions	Primary contravening provision
A loan to member or relative that was greater than 5% of the fund’s assets	Subsection 65(1) for the loan and subsection 84(1) for the in-in-house asset	Subsection 65(1)
Access to member benefits without meeting a condition of release	Subsection 34(1) for operating standards and subsection 65(1) for financial assistance	Subsection 34(1)

In the first example, the in-house asset is the secondary breach due to the primary breach of lending money to a member or relative.

In the second example, financial assistance is the secondary breach as a result of the primary breach when member benefit payments did not meet a condition of release.

The guidelines also state that there may be circumstances that warrant penalty remission if the cumulative penalty is considered inappropriate. They refer to a situation where trustees made 10 withdrawals without meeting a condition of release, which is also providing financial assistance to members. These contraventions could result in a penalty amounting to $144,000. In this example, the case officer will remit the penalty relating to financial assistance, as this is not the primary breach. They will then review the penalty applied to the 10 withdrawals, to ensure it is fair and just. In this case, further remission is appropriate to ensure the penalty is at the level equivalent of the trustees taking the withdrawals as a single transaction.

The release of this guidance seems to indicate the ATO is taking a softer approach to multiple penalties, particularly where trustees have voluntarily disclosed breaches and are working with the ATO to rectify them.