SMSF trustees will pay a hefty price. In July 2012 draft legislation was issued to overhaul completely the penalty system available to the Australian Taxation Office for breaches by trustees of self-managed superannuation funds. The new system applies to contraventions by trustees from July 1 this year. The need for the new penalty system was identified by, and became one of the recommendations of, the Cooper review into superannuation. Before this new penalty system, the ATO had little flexibility when it came to imposing penalties for breaches of superannuation laws and regulations. In addition to imposing penalties for breaches the ATO will issue rectification directions and can also require trustees of SMSFs to undertake compulsory education. At the heart of the new penalty system is a scale of fines payable by trustees, depending on the seriousness of the offence. The fines are based on the number of penalty units prescribed for each offence. The highest fines will be levied at 60 penalty units, while for lesser breaches of the regulations fines are calculated at five penalty units. When the new penalty system was first proposed the value of a penalty unit was $110. In December 2012 the value of penalty units was increased to $170. This means the lowest fine payable by trustees of an SMSF have increased from $550 to $850. The maximum has increased from $6600 to $10,200. Fines for breaches of superannuation regulations are levied on the individual trustees of an SMSF or on the directors of the corporate trustee of an SMSF. There is a specific ban in the act for trustees, or directors of the trustee company, to be reimbursed by the SMSF for penalties imposed. From the way the new penalty legislation is worded there would appear to be no discretion on whether a penalty will be levied or not. Breaches where the lowest penalty of $850 will apply include administrative issues such as not appointing an investment manager in writing or failing to provide information as required by regulators. For slightly more serious administration breaches, such as trustees failing to prepare the required statements for an SMSF or not keeping the required documentation such as minutes of meetings for at least 10 years, 10 penalty units will apply, resulting in a fine of $1700. The highest fine of $10,200 will be imposed for breaches by an SMSF such as lending to members or associates, borrowing funds unless it is in accordance with the limited recourse borrowing rules, and where the in-house asset limit of 5 per cent is breached. In addition to paying the fines, the trustees of an SMSF will be issued with a rectification direction in writing by the ATO and also might be directed to undertake a compulsory education course. Rectification directions will specify what corrective action must be taken, the evidence that must be supplied to show that the rectification direction has been followed, and a time period that the corrective action must be taken within. Where an education direction is issued by the ATO to trustees of an SMSF it will specify the approved course of education to be undertaken. It also will require the trustees to provide evidence that they have completed the course. This education requirement applies to both individual trustees and also directors of a corporate trustee. Trustees that do not take the corrective action, or the education course at all, or within the time limit specified, will have committed an offence and will be subject to a fine of 10 penalty units.