In the 2023-24 Mid-Year Economic and Fiscal Outlook (MYEFO) released on 13 December, the government confirmed it would increase the amount of the Commonwealth penalty unit by 5.4 per cent from $313 to $330, commencing four weeks after passage of legislation.

The government previously increased the penalty from $275 to $313 on 1 July 2023. It has increased by 83 per cent since 30 June 2017 when the regime was first introduced.

Penalty units can be applied by the ATO under s 166 of the Superannuation Industry (Supervision) Act, for many reasons including:

· s 65(1): lending to members or relatives (with exceptions): 60 penalty units

· s 67(1): borrowing (with exceptions): 60 penalty units

· s 84(1): failing to comply with in-house asset rules: 60 penalty units

· s 103(1): failing to keep minutes: 10 penalty units

· s 104(1): failing to keep records of changes of trustee: 10 penalty units

Butler said small contraventions like an SMSF trustee providing a loan to a member could cost members hundreds of thousands of dollars with this latest increase.

“It could cost members of an SMSF up to $120,000 for one contravention which is outrageous,” he said.

“[You have to ask] is that proportionate to the crime or mischief involved? At DBA Lawyers we have seen penalties in the millions of dollars and a submission is needed to seek remission. Even if the contraventions are unintentional, this is considered a strict liability offence, so it doesn’t matter if the member or trustee was acting honestly, if you made an error, bad luck.”

Butler continued that with the cost-of-living crisis facing many Australians, the automatic indexing of these penalties is “getting way out of line with some types of issues in relation to SMSF contravention”.

“In an indirect way, this is a way for the government to raise revenue. They are treating these contraventions as a criminal act, rather than a white-collar misdemeanour, even if they were an honest and inadvertent oversight.”

“It is serious money. For example, an SMSF will receive a 60-penalty unit contravention of $19,800 for providing a loan to a member and if there are two individual trustees, that’s a whopping $39,600.”

He added that another common example of human error is making an unauthorised withdrawal or failing to immediately reimburse the member for an expense paid on behalf of a fund.

Butler said it is not just members and trustees who face penalties and warned that advisers could be implicated in contraventions too if they have been seen to give incorrect advice.

“An adviser who has not been proactive in recommending a corporate trustee may be asked to pay the additional penalty if the adviser has not brought the difference to the client’s attention.”

Administrative penalties are imposed on each individual trustee, whereas directors of a company are jointly and severally liable for these penalties.

The ATO does have guidelines on remitting these penalties and trustees should seek expert assistance wherever in doubt.