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Trustee behaviour in a COVID-19 world

SMSF trustee behaviour will be under scrutiny from the Australian Taxation Office and they're set to face some tough penalties if they assist in the illegal early release of super.

Under the government's ERS scheme, a number of key issues face SMSF trustees and navigating those issues can be complex, as the ATO releases new information day by day.

Interestingly, there is no hard guidelines on what will be considered illegal, as the ATO said it will be determined by trustee "behaviour".

Speaking to SMSFA head of technical Peter Hogan, ATO director of SMSF client engagement Steve Keating outlined the punishments trustees will face and how they are determined.

"If an individual provides to us a false or misleading statement, we will make a determination about the behaviour of the individual at the time they made that statement," Keating said.

"As you might imagine, if someone has made a genuine mistake, then there is no penalty that applies for that."

Conversely, Keating said if a trustee is aware the statement they're making is false the ATO will put their behaviour "solely between recklessness or intentional disregard".

"Where someone exaggerates the magnitude of the impact of COVID-19 or they guess because they have made no effort to validate the effects, this may suggest that their behaviour is somewhere between a failure to take reasonable care and recklessness," Keating said.

If the ATO determines that a trustee has failed to take reasonable care, 20 penalty units will apply, each one worth $210.

That means a trustee will receive a penalty of $4200 if their behaviour suggests they failed to take reasonable care.

If a trustee's behaviour suggests they were reckless, 40 penalty units will apply, for a total of $8400.

The most serious offence, intentional disregard, will attract a penalty of 60 units, amounting to $12,600.

If trustees thought they could hide the payments under the guise of a loan, then Keating said the ATO is on top of that too.

"Often when we investigate, we see that the "loan" doesn't have the characteristics of a loan; there is no loan agreement, no repayment schedule, and generally there are no repayments at all," he said.

"When we see that, we don't accept that it's a loan and we will consider it illegal early release."

If a member has early access to their super, they will need to declare that as taxable income on their tax return, which Keating said most never do.

"When that happens, we will amend the income tax return and as a result of that, will trigger an event where a shortfall penalty will apply," Keating said.

"The size of that penalty is determined by an assessment of the SMSFs behaviour when they lodged that income tax return."

Keating said a failure to disclose the $10,000 as taxable income will induce penalties between 25% and 75% of the amount depending on whether it is considered a failure to take reasonable care, recklessness or an intentional disregard.

For the trustee who allows it to happen though, the punishment will be much worse.

"We will look to disqualify that individual, that disqualification will be made public and they will no longer be able to operate an SMSF," Keating said.

"I think it is important that trustees do understand there are severe penalties if they make false misleading statements to us."

Read our full COVID-19 news coverage and analysis here.

Read more: ATOAustralian Taxation OfficeCOVID-19Steve KeatingSMSFAPeter Hogan
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