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Stronger Super Measures

The Stronger Super measures represent the Government’s response to the review of the governance, efficiency, structure and operation of Australia’s superannuation system.

With respect to the SMSF Stronger Super measures, you need to be reminded of the critical aspects, which are geared to take effect on 1 July 2013.

We can summarize the Recommendations as follows:

Stronger Super RecommendationAnnounced Start DateAmended Start Date
8.2 Legislation should be passed to provide the ATO with the power to issue administrative penalties against SMSF trustees.1 July 20121 July 2013
8.3 SIS legislation should be amended to provide the ATO with the power to issue relevant persons with a direction to rectify specified contraventions within a specific reasonable time.1 July 20121 July 2013
8.4 The ATO should be given the power to enforce mandatory education for trustees who have contravened SIS legislation.1 July 20121 July 2013
8.13SIS legislation relating to acquisitions and disposals between related parties in SMSFs (but not APRA-regulated funds) should be amended so that either:(a) where an underlying market exists, all acquisitions anddisposal of assets between SMSFs and related parties

must be conducted through that market; or

(b) where an underlying market does not exist,

acquisitions or disposals of assets between related

parties must be supported by a valuation from a suitably

qualified independent valuer.

 

1 July 20121 July 2013Submission closed 16 Jan 2013
8.24 Legislation should be passed to provide for criminal and civil sanctions to enable the ATO to penalize and discourage illegal early release scheme promoters.1 July 2012Royal Assent
8.25 The Government should amend existing tax laws so that amounts illegally early released be taxed at the superannuation non-complying tax rate.1 July 20121 July 2013

1. Administrative Penalties – contraventions occurring after 1 July 2013

The Commissioner whilst responsible for the regulation of SMSFs, it was found he lacked flexible and proportionate powers to address non-compliance with superannuation laws.

The review recommended that the Regulator be provided with additional educational and punitive tools to address non-compliance with the SIS Act or SIS Regs by individual trustees or Directors of corporate trustees of SMSFs.

The proposed new law means the regulator will have the ability to issue:

  • A ‘Rectification Direction’ – where the person will be required to undertake a specified action to rectify the contravention within a specified time and provide the Regulator with evidence of the person’s compliance with the direction.
  • An ‘Education Direction’ – where the person is required to undertake a specified course of education within a specified time frame and provide the Regulator with evidence of completion of the course. The Regulator may approve education courses.

The regulator may issue an education direction to a person where the person’s lack of knowledge and/or understanding of their obligations has contributed to their contravening the SIS Act or SIS Regs.

Penalty Amounts

The value of a penalty unit has increased from $110 to $170 each.  Proposed penalties now range from $850 to $10,200 as per the table below:

Provision of this ActSummaryAdministrative PenaltyTotal Penalty
Subsection 34 (1)Prescribed operating standards must be complied with

20

$ 3,400

Section 35BPrepare and maintain proper accounting records

10

$ 1,700

Subsection 65 (1)Lending to members prohibited

60

$ 10,200

Subsection 67 (1)Borrowing or maintain existing borrowing prohibited

60

$ 10,200

Subsection 84 (1)In-house asset rules must be complied with

60

$ 10,200

Subsection 103 (1)Retain minutes of meetings for 10 years (Trustee)

10

$ 1,700

Subsection 103 (2)Retain minutes of meetings for 10 years (Individual Trustee or Corporate)

10

$ 1,700

Subsection 103 (2A)Retain for 10 years on election under 71E (Geared unit trust election)

10

$ 1,700

Subsection 104 (1)Retain for 10 years change of trustees & change directors of corporate trustee and consents under section 118 (consent to act as trustee)

10

$ 1,700

Subsection 104A (2)Sign ATO approved trustee declaration within 21 days of becoming trustee or director

10

$ 1,700

Subsection 105 (1)Retain Member or beneficiary reports for at least 10 years

10

$ 1,700

Subsection 106 (1)Notify regulator immediately if aware of adverse event

60

$ 10,200

Subsection 106A (1)Duty to notify Commissioner of Taxation of change in status of entity

20

$ 3,400

Subsection 124 (1)Investment managers must be appointed in writing

5

$ 850

Subsection 160 (4)Failure to comply with education direction

5

$ 850

Subsection 254 (1)Information to be given to regulator

5

$ 850

Subsection 347A (5)Obligation to participate in the Regulator’s statistical program (if selected)

5

$ 850

Who pays the penalties?

The costs imposed under the proposed administrative penalty regime are payable personally by the person who has committed the breach and cannot be paid or reimbursed from assets of the SMSF.

Directors of a corporate trustee of a SMSF will be jointly and severally liable to pay an administrative penalty that is imposed on the trustee.

For Education Directions, how do you prove it’s been completed?

If a trustee or director of a corporate trustee of an SMSF undertakes a course of education in compliance with the Regulators direction, they must sign a declaration – no later than 21 days after completing the course of education – that they understand their duties as a trustee of a SMSF or as director of a body corporate that is such a trustee.

2. Acquisitions and disposals of certain assets by SMSFs and related parties – Effective 1 July 2013

These changes stem from the Regulators concerns that off market acquisition and disposal of assets between related parties and SMSFs; where the guiding mind of both buyer and seller can effectively be the same person; lacks transparency, is inherently risky and is open to greater abuse than non-related party transactions.

The changes imposed require acquisitions and disposals of assets between related parties and SMSFs should be conducted through an underlying market where one exists, or where one does not exist, must be supported by a valuation from a suitably qualified independent valuer.

Acquisition Exceptions

The SMSF will still be able to buy listed securities and business real property from the related party provided it is done via the secondary market or backed by an independent valuation.

Disposal Exceptions

The SMSF can still dispose of listed securities, business real property and collectibles provided they are done so via the second market; backed by an independent valuation report; or done so in accordance with the regulations in the case of collectibles.

Failure to meet the new acquisition or disposal rules will contravene a civil penalty provision, to which civil or criminal penalties may be sought by the Regulator.

Given these new rules apply from 1st July 2013, it is recommended any assets likely to be sold in the ensuing years be brought forward prior to 30 June in order to avert the stricter guidelines.  This is particularly the case for collectibles and personal use assets which must be disposed off prior to 1 July 2016 under the transitional rules.

3. Market Valuations, Insurance and Asset Separation from Trustees personally

Effective from 7 August 2012, Regulation 2012 (No.2) was registered to amend the SIS Regs in the following ways:

Market Valuation Requirements

For the FYE 2013 and later income years, trustees of SMSFs must value SMSF assets at market value for reporting purposes as defined in s.10(1) of the SIS Act.

Failure to comply with this regulation will attract a penalty of 100 penalty units – which equates to $17,000.

Investment Strategy Changes

Trustees of SMSFs should consider, as part of the fund’s strategy, whether they should hold a contract of insurance that provides insurance cover for one or more members of the fund.

Trustees are now required to not only formulate and give effect to, but also regularly review the entity’s investment strategy.  Regular reviews are designed to take into account factors such as the changing circumstances of the fund and its members.

Trustees must evidence their compliance with these requirements by way of written documentation of decisions in the funds investment strategy.  A ‘regular’ review is considered to be annually.

A conviction for intentional or reckless disregard results in a fine not exceeding 100 penalty units – which equates to up to $17,000.

Separation of Assets

Trustees of an SMSF must keep money and other assets of the fund separate from any money and assets held by the trustees personally or by a standard employer-sponsor or an associate of a standard employer-sponsor of the fund.  In making this requirement an operating standard, the ATO will have a direct power to enforce this requirement under Reg 4.09A.  An example of this would be where investments such as shares are incorrectly recorded in a members own name rather than in the capacity as trustee of the SMSF.

A conviction for intentional or reckless disregard results in a fine not exceeding 100 penalty units – which equates to up to $17,000.

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