As of July 2023, the amount of a penalty unit has increased, significantly impacting penalties for breaches of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA). For Self-Managed Superannuation Fund (SMSF) trustees, this means they need to exercise extreme caution to avoid incurring hefty penalties. In this blog post, we'll explore the implications of the penalty unit increase, the benefits of appointing a corporate trustee for an SMSF, and the importance of compliance with the SISA.
Penalty Unit Increase and SMSF Trustees The penalty unit has undergone a substantial increase of 74% since July 2017, with the latest increase from $275 to $313 as of July 2023. Administrative penalties under section 166 of the SISA, such as lending to members or relatives, borrowing, non-compliance with in-house asset rules, and failure to keep minutes and records, have also increased accordingly. For instance, penalties for a single contravention have risen from $16,500 to $18,780.
Benefits of Appointing a Corporate Trustee Appointing a corporate trustee for an SMSF offers numerous benefits, particularly when it comes to administrative ease in the event of a trustee's death or legal incapacitation. Transferring asset holdings can be complex and time-consuming for individual trustees, making a corporate trustee an attractive option. Moreover, the use of a corporate trustee can significantly impact the penalties imposed. With individual trustees, penalties multiply as the number of trustees increases. On the other hand, corporate trustees are subjected to a single administrative penalty, regardless of the number of directors. The table below illustrates the differences in penalties for various trustee setups:
No. of Individual Trustees | Penalty for a Single Contravention | Total Penalty | Penalty for Corporate Trustee | Difference in Penalty using a Corporate Trustee |
2 | $18,780 | $37,560 | $18,780 | $18,780 |
3 | $18,780 | $56,340 | $18,780 | $37,560 |
4 | $18,780 | $75,120 | $18,780 | $56,340 |
5 | $18,780 | $93,900 | $18,780 | $75,120 |
6 | $18,780 | $112,680 | $18,780 | $93,900 |
Complying with SISA to Avoid Penalties It's essential to understand that penalties for SMSF trustees are imposed only in response to breaches of the SISA. While most trustees do not intend to violate the rules, inadvertent errors can lead to penalties, such as unauthorized withdrawals or delayed reimbursements. Additionally, SMSF auditors are now more active in reporting breaches through auditor contravention reports (ACRs), exposing trustees to a greater risk of penalties.
The Way Forward Given the significant increase in the penalty unit, SMSF trustees should seriously consider appointing a corporate trustee. By doing so, they can reduce the risk of higher administrative penalties for contraventions. However, it is crucial to seek expert advice before making significant changes, like appointing a corporate trustee, and take prompt action in case of any breaches to minimize the adverse impact.
Conclusion With penalties for SMSF trustees escalating due to the increase in the penalty unit, understanding the implications and adopting the right trustee structure becomes vital. Appointing a corporate trustee offers several benefits and can mitigate the risk of higher penalties.
