Taxman’s new power to address super law contraventions

The Superannuation Legislation Amendment (Reducing Illegal Early Release and Other Measures) Bill 2012 (the Bill) and Income Tax Rates Amendment (Unlawful Payments from Regulated Superannuation Funds) Bill 2012 (the Rates Bill) were introduced into the House of Representatives on 29 November 2012. The Bills seek to implement the following Stronger Super measures for the SMSF sector:

• administrative penalties for SMSF trustees;

• promoter penalties for illegal early release schemes;

• taxation of unlawful superannuation payments; and

• roll-overs to SMSFs – obligations under anti-money laundering and counter-terrorism financing.

Penalties for SMSF trustees

The Bill will establish an administrative penalty regime for trustees and directors of corporate trustees (referred to here as “SMSF trustees”) for certain contraventions of the SIS Act. Broadly, the proposed new penalty powers are designed to provide the Commissioner with a "smaller stick" (via an ATO administrative decision) to "encourage" recalcitrant SMSF trustees to quickly remedy defects, rather than rely purely on the existing heavy-handed enforcement powers.

If an SMSF trustee contravenes one of the SIS Act provisions listed in proposed s 166 of the SIS Act, the person will be liable to an administrative penalty as follows:

• 60 penalty units – ss 65(1), 67(1), 84(1) and 106(1);

• 20 penalty units – ss 106A(1) and 34(1);

• 10 penalty units – ss 35B, 103(1), 103(2), 103(2A), 104(1), 104A(2) and 105(1); and 

• 5 penalty units – ss 124(1), 160(4), 254(1) and 347A(5).

Note: From 28 December 2012, a penalty unit will be set at $170 (up from $110). Accordingly, the administrative penalties for SMSF trustees will range from $850 to $10,200.

Any costs imposed under the proposed administrative penalty regime will be payable personally by the person who has committed the breach (and cannot be paid or reimbursed from assets of the SMSF): proposed s 168 of the SIS Act. The Commissioner will be able to impose the administrative penalty on an SMSF trustee using the existing machinery provisions for penalties in Div 298 of Sch 1 to the Taxation Administration Act 1953 (TAA).

Rectification and education directions

The Commissioner will also be given the power to issue SMSF trustees with "rectification directions" and "education directions" for contraventions of the SIS Act and SIS Regulations.

Rectification directions

A rectification direction may be given if the Commissioner "reasonably believes" that an SMSF trustee has contravened the SIS Act or SIS Regulations in relation to the fund: proposed s 159 of the SIS Act. A rectification direction may require the person to take a specified action to "rectify" the contravention and to provide the ATO with evidence of the person's compliance with the direction. "Rectifying" will generally involve putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.

A person to whom a rectification direction is given will be required to comply with the direction before the end of the period specified in the direction. Failure to comply with a direction will be a strict liability offence (attracting 10 penalty units). In deciding whether to give a person a rectification direction, the Commissioner is required to have regard to any financial detriment that might reasonably be expected to be suffered by the fund and the nature and seriousness of the contravention.

Unlike enforceable undertakings, where a person is not limited to the undertaking it may offer the ATO, a rectification direction given by the Commissioner will be restricted to rectifying contraventions of the SIS Act or SIS Regulations. However, a rectification direction will not affect the operation of enforceable undertakings under s 262A of the SIS Act.

Education directions

An education direction may require a person to undertake a specified approved course of education within a specified time frame and to provide the ATO with evidence of completion of the course. SMSF trustees will also be required to sign or re-sign the SMSF trustee declaration form to confirm that they understand their obligations and duties as SMSF trustees. The ATO will be able to approve courses of education for the purposes of the education direction. However, a fee must not be charged for an approved course.

A person may object against a decision of the ATO in the manner and timeframe set out in Pt IVC of the TAA.

Date of effect

The amendments will apply to contraventions that occur on or after 1 July 2013.

Illegal early release schemes – promoter penalties

The Bill proposes civil and criminal penalties for the promotion of illegal early release schemes involving unlawful payments from regulated superannuation funds. Currently, there are no specific penalties for promoters of illegal early release schemes who are not themselves trustees of a regulated superannuation fund. The Minister for Superannuation, Bill Shorten, said the new penalties will deter promoters from using illegal early release schemes to exploit vulnerable people. Promoters will face civil and criminal penalties, including a fine of up to $340,000 and/or imprisonment of up to five years, Mr Shorten said. (Source: Minister for Financial Services and Superannuation media release No 087, 29 November 2012, www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2012/087.htm&pageID=003&min=brs&Year=&DocType=0.)

The Bill provides that a person must not "promote" a "scheme" that has resulted, or is "likely to result" (an objective test), in a payment being made from a regulated superannuation fund otherwise than in accordance with payment standards prescribed under s 31(1) of the SIS Act. A person who promotes such a scheme contravenes a civil penalty provision (with flow-on civil and criminal consequences).

"Promote", in relation to a scheme, will include (but is not limited to) entering into a scheme, inducing another person to enter into a scheme, carrying out a scheme, commencing to carry out a scheme and facilitating entry into, or the carrying out of, a scheme: proposed s 68B(3) of the SIS Act. The Explanatory Memorandum sets out factors that may indicate that a person has promoted a scheme. These include, but are not limited to the following:

• the person markets the scheme (ie by marketing directly or otherwise) or encourages the growth of or interest in the scheme. This may include conduct such as distributing marketing material, advising persons to consider the scheme or employing or recruiting other persons to conduct or market the scheme;

• the person devises or designs the scheme or part of the scheme. This may include conduct such as setting up the legal or financial architecture of the scheme, constructing or commissioning the production of documents to be used, or establishing mechanisms to obtain (or facilitating circumstances that may allow persons involved in the scheme the ability to obtain) financial or other benefits in relation to the scheme;

• the person facilitates the means by which the participants can participate in the scheme. This may include providing some of the necessary paperwork for participants to sign or directing them to complete the necessary documents;

• the person provides information to the participants as how to undertake activities that ultimately result in the individual accessing their superannuation benefits without meeting a condition of release; and

• the person undertakes the relevant activity with the intention that this will likely result in an unlawful payment from a superannuation fund.

Penalties

By making the promotion of illegal early release schemes a civil penalty contravention, a breach may result in a fine up to 2,000 penalty units (ie $340,000). Where a body corporate is convicted of an offence, a court may impose a pecuniary penalty up to five times the amount of the maximum penalty: s 4B(3) of the Crimes Act 1914. Contravention of a civil penalty provision may also be an offence punishable on conviction by imprisonment of up to five years: s 202(1) of the SIS Act.

Date of effect

The promoter penalty provisions will apply to actions occurring after Royal Assent.

Tax rate for unlawful payments

The Rates Bill will amend the Income Tax Rates Act 1986 to tax the "unlawful early payment remainder" of superannuation benefits received in breach of the legislative requirements at 45% (instead of the individual's marginal rate).

Date of effect

The amendments to the tax rate described above will apply to assessments for the 2013–2014 and later income years.

Roll-overs to SMSFs

The Bill proposes to include a roll-over to an SMSF (from a superannuation fund that is not an SMSF) as a "designated service" under s 6(2) of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).

Under the AML/CTF Act, a reporting entity that offers a "designated service" to a customer must first carry out a procedure to identify and verify the customer before providing the designated service to the customer. The trustee of a superannuation fund (other than an SMSF) effecting the roll-over is the provider of the designated service. The customers of this designated service are the member of the transferring fund who requests the roll-over and the SMSF that is receiving the roll-over.

Accordingly, superannuation funds transferring benefits (roll-overs) to SMSFs will be required to comply with a range of AML/CTF obligations, such as:

• customer identification and verification of identity;

• record-keeping;establishing and maintaining an AML/CTF program;

• ongoing customer due diligence; and

• reporting (of suspicious matters, threshold transactions and international funds transfer instructions).

Date of effect

This measure will apply to roll-overs to SMSFs made on or after 1 July 2013.