SMSF: Can you afford not to have a corporate trustee?

With a do-it-yourself super fund administrative penalty regime certain to come into effect from July 1, there is a new reason why DIY funds should have a corporate trustee.

The way the new penalties will be imposed, says AMP SMSF technical specialist Peter Burgess, adds further weight to the benefits of DIY funds having a corporate trustee rather than individual trustees.

Another way of looking at this is DIY funds with individual trustees just over three-quarters of the estimated 515,000 funds – having an extra incentive not to commit any breaches of super rules and regulations that will attract administrative penalties.

If a DIY fund has a corporate trustee with directors – fewer than one in four funds – and the trustee becomes liable to pay an administrative penalty, it will be levied on the trustee as a single entity. However, if the fund has individual trustees, each is likely to be liable to pay the penalty.

For example, says Burgess, if a fund with a two-director corporate trustee fails to prepare financial accounts, a $1700 penalty could be imposed on the body corporate, which the directors must pay between them. But if the trustees are individuals, each individual trustee could incur a $1700 penalty.

Where a fund has two individual trustees, they will be up for a total $3400.

Furthermore, it will be a personal liability on the trustees, which cannot be paid for or reimbursed from the assets of the fund.

As far as the directors of the corporate trustee are concerned, they will also be personally liable for any penalty but they can share the penalty. That said, if one can’t pay for any reason then the other is liable for the lot

The new regime, says Burgess, will have the greatest effect on trustees who have been serial offenders against the super rules. Many have been able to get away with it mainly because of a reluctance by the DIY super regulator, the Australian Taxation Office, to take the court action necessary to impose penalties for breaches.

As far as the administrative penalties that trustees will be up for, there are four that trustees will face, each with fines of $10,200 per trustee.

They will be imposed for such offences as trustees failing to notify the ATO of an event that can have a significant adverse effect on the financial position of their fund, and trustees lending fund money to a member or relative of a fund member or providing any other financial assistance using the resources of the fund. Other major offences with similar $10,200 penalties are trustees borrowing money in an arrangement that fails to satisfy the requirements of a limited-recourse borrowing arrangement and trustee breaches of the in-house asset rules where a fund allows the value of investments to related parties like members and relatives to exceed 5 per cent of the total fund value.

One significant related-party rule that wasn’t introduced in the administration penalty regime, says Burgess, is deliberate actions to breach the rules. Where a trustee intentionally acquires an asset from a related party, knowing the 5 per cent rule will be breached, they could be up for penalties of up to $220,000 or a jail term of up to one year.

The rules for intentional acquisitions provide some flexibility where trustees may have acquired investments that breached the rules unintentionally. They may have, for instance, acquired shares from a related party that were not listed on a stock exchange under a mistaken belief that the rules that allow shares listed on a sharemarket to be acquired from a related party also applied to unlisted shares.

Among offences with $3400 administrative penalties are any failures to comply with the prescribed operating standards for super funds. Examples of this are breaches of the contribution rules where they have to ensure they only accept contributions when allowed to, along with breaches of the rules that require benefits to be preserved until a member satisfies a condition that allows them to be released. Such conditions include reaching the age of 55, where benefits can be taken under the transition to retirement rules, reaching 60, where benefits can be taken when a member retires, and 65 when super can be taken freely with no preservation restriction.

Trustees failing to notify the ATO that the fund has ceased to be a selfmanaged super fund is a another $3400 offence.

There are six offences with $1700per-trustee penalties for major administrative failure, like not preparing financial statements for the fund and retaining records for five years, failing to keep and retain minutes of trustee meetings for 10 years, and not keeping records of changes of trustee for 10 years.

An important $1700 offence for new funds is trustees failing to sign a trustee declaration within 21 days of becoming a trustee, then retaining this declaration for 10 years. Not retaining copies of member reports for 10 years attracts a similar $1700 penalty, as does not retaining elections as required for certain preAugust-1999 investments for the same time.

Breaches that attract penalties of $850 are failing to appoint investment managers in writing, failing to comply with an education direction issued by the ATO, failing to provide information to the ATO in the approved form, and failing to provide statistical information to the ATO when instructed.

Burgess says the aim of the new regime is to impose penalties more appropriate than the current very strict rules where the regulator can declare a fund non-complying, and trustees liable to being banned and funds stripped of half their assets in tax penalties.

Another current major negative is the ATO having to go through a timeconsuming court process to penalise any trustees. The new penalty regime will not require court action, although the ATO will still have to show why trustees will be penalised.

The new regime will have greatest effect on trustees who have been serial offenders.

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