A new penalty regime has been released that will penalize SMSF auditors. This is a significant shift in the responsibility of SMSF gatekeepers. Practice Statement Law Administration0/3(PSLA).
The PSLA guides ATO staff about how to apply administrative sanctions. This new SMSF penalty era will make it difficult for SMSF auditors to do their jobs effectively.
The PSLA's primary focus is on s166 SIS, which outlines the rules for administrative penalties.
A trustee who breaches s166 SIS is subject to an administrative penalty. The new PSLA provides the ATO with a clear path for determining whether remission is possible.
Administrative Penalties
Introduced administrative penalties in 2014. The ATO took a softly-softly approach to this issue by issuing educational directives and remitting SMSF penalties.
The number of auditor contraventions reports has remained relatively stable at 2% of SMSFs since then, and trustee behaviour has not changed.
Let's be very clear: The legislation has not changed.
The ATO now enforces this penalty regime under the approach taken with the updated Penalty Regulations. SMSF auditor independence Guidelines
What's a Penalty Worth?
There are stiff fines available for each penalty unit valued at $222 in the 2021 fiscal year.
S65 SIS (loans and members) is responsible for 20% of all infringements. This is a shocking indictment of trustee behaviour that leads to a staggering $13,320 penalty.
The penalty can't be paid by trustees using SMSF resources. It applies to both the individual trustees and collectively to all directors of the corporate trustee.
The most compelling reason to be a corporate trustee is still to this day.
A corporate trustee is penalized for a breach of s65 SIS. This means that there is only one penalty, as it is one trustee = $13,320. All individual trustees are subject to a separate penalty (maximum 4 x $13,320 = $53,230).
Individual SMSF trustees will be affected by the introduction of six-member funds. An SMSF penalty will apply to them. The kids may wonder why they joined their fund.
Other Compliance Treatments
Other compliance treatments, such as an enforceable undertaking, an education or rectification direction or an education or correction direction, can be applied by the ATO in addition to the administrative penalty. They can also remit the penalty in part, whole or none depending on the facts of each case.
The PSLA lists the factors that will determine if remission is appropriate or may affect the severity of a penalty.
- What is the purpose of the penalty provision?
- Trustee behaviour and circumstances
- The severity of the infringement
- How were the fund assets affected?
- What was the time frame in which violations occurred?
- Unjustified or unintended results
Multiple Penalties
Furthermore, multiple violations could result in administrative sanctions.
If one non-compliant incident develops into multiple contravening provisions in SIS, the ATO will generally remit to a level that reflects the direct infringement.
It May does not seem excessive in light of past SMSF penalty history by the ATO. Still, any penalty reduction will depend on these factors and whether or not the cumulative penalty is justifiable, proper, and just given the overall facts of the case.
SMSF Auditor Independence
SMSF auditors need to be alert because they must report all contraventions accurately to minimize risk.
Sometimes, SMSF auditors might be confronted by clients who want to report any infringements required under their professional obligations.
The new independence guidelines describe the situations in which an SMSF auditor is prevented from acting objectively by perceived or actual pressure from a client.
According to the guide, auditors should decline to end or terminate engagements if they cannot resolve the circumstances that threaten independence.
If an SMSF auditor fails to report an infringement due to an independence threat, the ATO will not hesitate to refer them to ASIC.
ACR Reporting A New Penalty Regime
SMSF auditors might feel coerced to change their ACR by substituting an infringement not listed in s166 SIS. For example, instead of reporting a breach in s65 (financial aid to members), where members take out $50,000, SMSF auditors may be asked to write a contravention to r6.17 SISR.
This is because reporting the contravention this way does not negate the automatic application of 60 penalty units. However, s166 SIS doesn't explicitly mention r6.17 SISR. However, this approach is technically incorrect and limited.
Section 31 SIS outlines the operating standards that SMSF trustees must adhere to. Paragraph (h) relates to the payment of benefits. Section 34 SIS states that operating standards must always be followed. S166 SISA imposes a penalty administratively for any violation of those standards.
It is redundant to pressurize the SMSF auditor to report the infringement under R6.17. The operating standards also apply.
The illegal early access penalty will result in two (2) separate penalties: First, a breaching s34(1) SIS is worth 20 penalty units, and secondly, a violation of 65 SIS is worth 60 penalty units.
Multiple penalties were imposed under different provisions of SIS. The direct infringement was s34(1) SIS. This is when benefits are not paid if a condition of release has been met. The PSLA principles would allow the ATO to generally remit the secondary penalty and reduce the total liability by 60 penalty units down to 20 penalty units, or $4,440. However, keep in mind that ATO penalty remission decisions will be considered on a case-by-case basis for each trustee who has been penalized.
The PSLA covers all aspects of SMSF audits and advisers. No matter how it is listed in s166 SIS, there is no way to get out of jail for a violation of any reportable section of SIS.
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