Red Alert for All SMSF Trustees – Fines and Personal Liability

MSI - SuperBy Rod Commins, Patterson Houen Commins, Lawyers, North Sydney.

The  ATO  requires  that  all  trustees  (including  new  trustees  of  existing  SMSFs  and  directors  of corporate  trustees)  of  self-managed  superannuation  funds  complete and  sign  a  Trustee Declaration  so  as  to  demonstrate  that  the  trustees  understand  their  duties  and  responsibilities under the Superannuation Law, such as:

  • The sole purpose test;
  • General trustee duties;
  • Investment restrictions;
  • Record keeping, reporting and lodgement obligations

(see  Trustee  Declaration  NAT71089  and  the  explanatory  fact  sheet  NAT71128  which  may  be accessed on the ATO website

The Trustee Declaration must be completed and signed within 21 days of the appointment of the trustee and must be retained with the SMSF’s documents and records for at least 10 years.

Penalties and Personal Liability

Given the substantial fines and personal liability for non-compliance, it is vital that all trustees of SMSFs  at  least  review  and  preferably  sign  the  updated  Trustee  Declaration,  even  if  they  have previously signed a Trustee Declaration.

Fines are calculated in penalty units, with the maximum being 60 penalty units and the minimum 5. In December 2012, the value of a penalty unit was increased from $110 to $170, so the lowest penalty is $850 and the highest $10,200 but remember penalties are levied on an offence by offence basis and they are payable personally by individual trustees or the directors of a  corporate  trustee. Reimbursement  of  these  penalties  from  the  funds  of  the  SMSF  is specifically banned.

The ATO can, in addition, issue rectification directions and require SMSF trustees to undertake compulsory education to remedy identified deficiencies.

Major Changes

The three major changes to the Trustee Declaration are:

  • A  requirement  to  review  the  investment  strategy  of  the  SMSF  on  a  regular  basis,
  • taking  into  account  all  relevant  circumstances  such  as  the  risk,  return,  liquidity  and diversification of any investments made;
  • A  requirement  to  consider  whether  the  SMSF  should  hold  insurance  cover  for  its members.

It is not mandatory to take out such insurance and there is no minimum level. However, to avoid  substantial  penalties, Trustees  must  keep  evidence  that  they  have  at  least considered taking out an insurance policy for one or more of the members of the fund. The consideration  can  be  contained  in  the  minutes  of  trustees’  meeting  and  it  is  prudent  to include  consideration  of  insurance  in  those minutes each time the investment strategy of the SMSF is considered.

A declaration from the Trustees of the SMSF that the Trustee is aware of not having access to the government’s financial assistance programme in case of financial loss due to theft or fraud.

The  government’s  financial  assistance  programme  is  only  available  to  trustees  of  the Australian Prudential Regulation Authority’s (APRA) regulated funds and not to SMSFs. If an  SMSF  does  suffer  loss  due  to  fraud  or  theft,  avenues  for  redress  may  be  found sometimes under the Corporations Law and if the fraudulent conduct was committed by a member of the fund, approaches can be made to the Financial Ombudsman Service.

Alternatives (not everyone’s cup of tea)

If SMSF members decide the burden of compliance and penalties is too much to bear, then they can choose to transfer their superannuation to an APRA regulated fund or appoint a registrable super entity licensee as trustee and become a Small APRA fund. This course would relieve the SMSF  trustees  from  responsibility  for  compliance  breaches  (which  would  be  passed  on  to  the approved trustee company) but costs and a certain ceding of control would be involved.

In  any  event,  action  is  required  and  if  you  need  help  and  advice  in  relation to compliance with these and other Superannuation requirements, please contact your local MSI advisor.

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