Information from the ATO regarding it SMSF penalty regime appears to indicate it will take a softer stance on the treatment of multiple breaches of early release provisions, but a harder line on the remission of penalties, according to an SMSF technical expert.
Accurium head of education Mark Ellem said the release of the ATO’s Practice Statement Law Administration (PSLA) 2020/3 in October 2020 appeared to show a common theme developing around breaches related to the withdrawal of funds from an SMSF prior to meeting a condition of release and how the regulator would treat those breaches.
“If someone withdraws money from an SMSF, it would either be a breach of the preservation rules, so a breach of the operating standard and therefore of section 34(1) [of the Superannuation Industry (Supervision) (SIS) Act], or it could be treated as a loan to a member,” Ellem said during a webinar today.
“If it is a loan to a member, it needs to be shown that it is a legitimate loan with documents, repayments and the imposition of interest, otherwise it was just early access and then it will be a breach of the preservation rules.”
He noted the PSLA addressed the issue of multiple breaches of a provision, such as section 34(1) of the SIS Act, and was likely to treat multiple breaches with a single penalty if it had the same effect as a single breach, such as 10 withdrawals of $5000 compared with one withdrawal of $50,000.
While this appeared to soften the blow for trustees, they still had to pay the tax bill that would be applied to the withdrawal, he pointed out.
“In this situation, we also must consider how the withdrawal is treated by the recipient for tax purposes,” he said.
“If an individual accesses their superannuation prior to meeting a condition of release with a nil cashing restriction, then that amount withdrawn is going to be fully accessible to them at their marginal tax rate.
“So, we see with early access there may be a lower penalty point, but the full amount is going to be assessable at their marginal tax rate.”
He also noted that while multiple breaches may be rolled into a single penalty, the ATO’s position on the remission of penalties was still dependent on trustee behavior.
“We can see from this PSLA that we might have a softening stance on multiple penalties, but it’s going to be a harder stance on the remission of penalties,” he said.
“That will depend primarily on circumstances of the breach and particularly the compliance record of the trustee, and also whether the trustee has rectified the breach or is in the process of rectifying that breach.
“We’ve got those guidelines now and they complement the other guidelines the ATO has issued,” he said, pointing to PSLA 2006/17, which covers the disqualification of individuals to act as trustees or directors of corporate trustees of an SMSF, and PSLA 2006/19, which covers when the ATO can issue a notice of non-compliance.
PSLA 2020/3 also requires the ATO to show that penalties are just and defensible and Deloitte national SMSF leader Liz Westover pointed out last year that while good behaviour, including rectification, may be considered by the regulator when setting penalties, trustees should not assume remissions would be automatic as a result of such actions.
