14 Feb SMSF housekeeping mistakes that will cost you, if you’re not careful
Be careful of what you throw out as you need to keep documents for 10 years.
Trustees of self-managed superannuation funds (SMSFs) may face significant penalties if they do not comply with the onerous regulatory obligations and requirements that come with the privilege of being in control of their own retirement savings.
This seems to be often forgotten by trustees who may not be as diligent in some aspects of running their SMSF as they ought to be. In an attempt to address compliance issues, the ATO introduced a new penalty regime in 2014 allowing it to levy administrative penalties on trustees which, depending on the severity of the breach, can go as high as $12,600 per trustee.
While the ATO imposes penalties for contraventions of the more serious provisions – such as the in-house asset rules or the prohibitions against borrowing or providing financial assistance to members/relatives – it also does this for breaches of trustee “housekeeping” obligations.
For example, did you know trustees have an obligation to keep a record of all decisions made by the trustees for the fund and could be liable for a $2100 fine simply for failing to save adequate records of trustee meeting minutes or written resolutions? If the fund has four individual trustees, that’s $8400 going into the ATO’s pocket.
Similarly, trustees have a duty to maintain records of any change of trustee or change in directors affecting the fund.
To meet their duty, trustees must not only keep the document effecting the change in trustees or directors and the relevant consents but also the mandatory trustee declaration form signed by each new trustee or director (unless the appointment occurred before July 1, 2007). In addition, the ATO must be notified of a change within 28 days of it occurring. Failure to comply will result in a $2100 fine.
A common pitfall is where trustees have kept all relevant records but disposed of them before the expiry of the mandatory period (generally 10 years). So next time you are gripped by the urge to spring clean, pay close attention to the date on the documents. Documentation tends to go missing when moving home or changing professional advisers, and trustees should be particularly vigilant at these times.
The failure of trustees to keep the assets of the fund separate from the members’ personal assets is another costly oversight. This includes operating the SMSF through the members’ personal bank account. This type of contravention not only exposes the members’ retirement savings to unnecessary risks from creditors or other parties in the event of personal or business disputes or financial difficulties, it also results in a $4200 fine from the ATO.
Be aware that the fine is payable per trustee personally. This means each individual trustee must pay the fine from their personal finances and cannot recover the amount from the fund. Where the trustee is a company, each director is jointly and severally liable to pay. As it is a strict liability offence, a fine is automatically imposed if specific provisions of the Superannuation Supervision Act 1993 are breached. Claiming ignorance of the rules or the breach generally will not help avoid the fine, although the ATO does have discretion to remit fines if the circumstances warrant it.
Trustees may have difficulties trying to shift the blame to their professional advisers for the contraventions as they are ultimately responsible and liable for the maintenance of their SMSF.
Finally, trustee misery may not end just with a hole in the wallet as, depending on the circumstances, the ATO also has the powers to disqualify trustees or even make the fund non-complying, causing substantial adverse financial consequences.