Proposal to increase the value of a penalty unit

The Government has proposed to increase the value of a penalty unit which is just another reason to consider a corporate trustee for your SMSF.

We have long recommended that SMSFs have a corporate trustee, rather than individual trustees.  Although establishing an SMSF with individual trustees is simpler and cheaper in the short term, the benefits of having a corporate trustee for your SMSF can far outweigh the short term savings.

Some of the key reasons for having a corporate trustee include:

  • Succession upon death (upon the death of a member, if a corporate trustee is in place, then there is no change to the trustee, but if individual trustees are in place, then a further trustee may be required, particularly if there were 2 members and one has passed away).
  • Trustee litigation exposure – if an SMSF is sued (for example, in relation to a personal injury claim relating to a property that an SMSF owns), individual trustees have potential personal liability, if the assets of the fund (or any insurance) are insufficient to cover the claim, whereas a corporate trustee does not.
  • Administrative efficiency – any changes in individual trustees, for example children entering or leaving the SMSF, require the names in which assets are held to be changed, including shares, real estate and bank accounts.  This can be administratively burdensome, but is avoided when a corporate trustee is in place.
  • SMSF Borrowing – if an SMSF is used to purchase real estate utilising a borrowing, most lenders require a corporate trustee to be in place.
  • Sole member funds – a single member SMSF with individual trustees is required to have a second individual trustee.  This means that some control is relinquished by the member to another person.  Having a corporate trustee means that the sole member can maintain total control over their fund.

Another key reason to have a corporate trustee, and the focus of this article, is the impact of penalties.

Under the Superannuation Industry (Supervision) Act, administrative penalties may be imposed by the ATO for a range of transgressions, even if inadvertent, rather than deliberate.  Those penalties range from 5 to 60 “penalty units”.  Examples of the provisions which attract the highest penalty of 60 penalty units include provisions relating to the prohibition on SMSFs borrowing (subject to allowed exceptions), lending to members or relatives, or investing in or lending to related entities outside of allowable limits (“in-house assets”).

Under the super legislation, if a penalty is imposed on individual trustees, then each trustee must pay that penalty.  However, if a penalty is imposed upon a corporate trustee, then only one penalty must be paid, and each director is jointly and severally liable for that penalty.  In both cases, the penalty must be paid from a person’s own money, and cannot be reimbursed from the SMSF.

The value of a penalty unit is currently $313, and is indexed every three years, but the Government is proposing to increase that amount to $330, commencing 4 weeks after the passage of the legislation, with indexation still to apply.

For example, if a fund with 4 individual trustees contravened the borrowing rules and the ATO imposed a penalty of 60 penalty units, $19,800 would need to be paid by each trustee from their own funds, once the new penalty unit rate applies.  In contrast, if the SMSF had a corporate trustee with 4 directors, only $4,950 would be payable by each director.

If you are interested in having a corporate trustee, please contact one of our specialists in our Super Team to discuss further.