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New penalties favour corporate trustee structure

The new administrative penalties to be applied via a sliding scale by the Australian Taxation Office (ATO) have presented a more compelling argument to employ a corporate trustee as opposed to individual trustees for SMSFs, according to a technical expert for the sector.

Under the new rules, penalty units and a corresponding dollar amount will be issued to SMSFs in breach of aspects of the legislation.

“The sliding scale has given the ATO the ability to level penalties depending on the seriousness of the breach. Now what’s interesting is how these penalties will be imposed on trustees,” AMP SMSF head of policy and technical Peter Burgess told the 2014 SMSF Professionals’ Association of Australia National Conference in Brisbane yesterday.

“If there are individual trustees of the fund, each individual trustee will incur the penalty. So if for example they had a fund that did not prepare proper financial statements, each individual trustee would incur a $1700 penalty.

“However, if it was a corporate trustee, only $1700 would be levied once on the corporate trustee. So if you ever needed another reason to have a corporate trustee, well there’s one.”

While there had been many changes to legislation governing SMSFs since the new federal government was elected that had helped to engineer a more equitable penalty regime, Burgess cited the residency rules for SMSFs as one penalty that had not been addressed and which needed attention.

“If your client fails the central management and control test or the active member test, the penalty is loss of complying status,” he said.

“And when you think the active member test is a very difficult test to understand, and a very difficult test to apply, most breaches of the active member test are inadvertent breaches.

“So let’s hope as part of the financial sector review that the industry has another chance to push for reforms around the residency laws for self-managed super funds.

“If the intention of those rules is to ensure only Australian residents benefit from the tax concessions in super, then those rules are not very effective in achieving that.”

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