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The SMSF penalties one year on: What have we learnt?

Peter Burgess

1 July 2015 marked the first anniversary of the introduction of the Australian Taxation Office’s new SMSF penalties – what has changed?

It’s still early days with the lodgement of the first batch of SMSF annual returns under the new penalty regime still some time off. In fact, with the 2014/15 SMSF annual returns for most SMSFs not due until next year, it’s unlikely we will see the full-force of the ATO’s new penalty regime in play much before the end of 2016. That’s not to say some SMSF trustees will incur the new penalties before then, as the ATO may and can choose to act on reported breaches before the lodgement of the fund’s annual return.

So 12 months on, is there anything we have learnt about the new penalties and their likely impact on SMSF trustee behaviour?

Before answering these questions I should point out that the SMSF sector does not, in my opinion, have a systemic compliance problem. Only about two per cent of SMSFs each year are reported as breaching one or more of the rules. This statistic hardly suggests there has been a systemic breakdown in compliance behaviour in the SMSF sector.


Nevertheless, I still believe that in due course the impact of the new SMSF penalty regime will be significant and their impact on the growth and integrity of the sector profound. And here’s why.

While two per cent of SMSFs with reported breaches may sound like a small number, it still equates to around 20,000 reported breaches of the rules each year. Many of these breaches, in fact the vast majority, are either inadvertent breaches of the rules or are the result of the SMSF trustees not fully understanding the rules and the responsibilities of an SMSF trustee.

One of the lesser known ATO penalties, which was introduced last year, is an education direction. An education direction may be given to an SMSF trustee, or a director of a corporate trustee of an SMSF, where a breach of the superannuation rules has occurred or may have occurred.

An education direction is issued by the ATO and requires the SMSF trustees, or a director of a corporate trustee, to complete an SMSF course approved by the ATO within a specified time frame.

The course of education must be provided on-line, must be free of charge and must be designed to provide a general awareness of a trustee’s obligations. It must include information about:

  • Trustee’s role and responsibilities within an SMSF
  • Sole purpose test
  • Investment restrictions imposed on trustees
  • Rules and limitations surrounding contributions and benefit payments
  • Administration involved in running an SMSF

The course is required to be spilt into sections with a quiz at the end of each section. The duration of the course is expected to be of a suitable length to enable all of the course content to be covered.

It’s 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 trustee and will be less likely to contravene the law again in the future. It’s also intended to provide an opportunity for trustees and directors to improve and refresh their overall knowledge of relevant superannuation laws.

The ATO considers an education direction is most likely to be issued where the person’s lack of knowledge or understanding of their obligations has contributed to the contravention. Given there are around 20,000 SMSF breaches reported to the ATO each year, many of which are likely to fall into the “lack of knowledge” category, a quick calculation suggests there could be many hundreds or even thousands of education directions issued by the ATO each year.

With this number of SMSF trustees undertaking structured SMSF education each year, it’s inevitable the level of non-compliance in the SMSF sector will start to fall. It’s also inevitable that more providers of ATO approved SMSF courses will emerge. Despite the fact the course must be provided free of charge, many organisations will no doubt jump at the opportunity to engage with individuals who either have an SMSF or are considering setting one up. The latter brings me to another important benefit linked to the introduction of education directions.

The emergence of a more vibrant SMSF trustee education industry will enable more individuals to access structured SMSF education. Trustees will be able to access these structured courses even if they haven’t been directed to do so by the ATO. Some individuals may voluntarily choose to complete an approved course prior to taking on the role of an SMSF trustee or as part of their assessment about whether or not an SMSF is right for them. Similarly, advice providers may encourage new SMSF trustees, and those considering an SMSF, to undertake an approved course to improve their understanding of the obligations of an SMSF trustee.

Greater access to structured SMSF education should also reduce the fear factor often associated with becoming an SMSF trustee. Lack of knowledge, or lack of access to quality information about the roles of an SMSF trustee, should no longer be a barrier to establishing an SMSF. Rather than discouraging individuals from setting up SMSFs, the introduction of education directions are more likely to result in more individuals considering the option of an SMSF and the right individuals ultimately setting one up.

Peter Burgess, general manager, technical services and education, SuperConcepts

The SMSF penalties one year on: What have we learnt?
Peter Burgess
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