ATO Powers In Response to SMSF Contraventions
The ATO – as the regulator of SMSFs (self-managed super funds) – has a range of treatments available to it to deal with SMSF trustees who have not complied with the super laws. The ATO says its primary focus is to encourage SMSF trustees to comply with the super laws. However, SMSF trustees should be aware of the range of penalties or actions that the ATO could apply in the event of a contravention.
These include the following actions:
- Education direction – the ATO says it may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The education course is designed to improve both the competency of SMSF trustees and their ability to meet their regulatory obligations, and to reduce the risk of trustees contravening the law in future.
- Enforceable undertakings – the ATO can decide whether or not to accept an undertaking from an SMSF trustee to rectify a contravention. The undertaking must be provided to the ATO in writing and must include the following:
- a commitment to stop the behaviour that led to the contravention;
- the action that will be taken to rectify the contravention;
- the timeframe to rectify the contravention;
- how and when the trustee will report that the contravention has been rectified; and
- the strategies to prevent the contravention from recurring.
- Rectification directions – the ATO may give a trustee or a director of a corporate trustee a written direction to rectify a contravention of the super laws. A rectification direction will require that a person undertakes specified action to rectify the contravention within a specified time, and provide evidence of compliance with the direction.
- Administrative penalties – from 1 July 2014, individual trustees and directors of corporate trustees will be personally liable to pay an administrative penalty for various contraventions of the super law (breaching the SMSF borrowing rules or the in-house asset rules etc). The penalty cannot be paid or reimbursed from the assets of the fund.
- Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened the super laws. The ATO can also disqualify an individual if it is concerned with the actions of that individual or if it doubts they are suitable to be a trustee.
- Civil and criminal penalties – the ATO may apply through the courts for civil or criminal penalties to be imposed. Civil and criminal penalties apply where SMSF trustees have contravened provisions relating to these:
- the sole purpose test;
- lending to members;
- the borrowing rules;
- the in-house asset rules;
- prohibition of avoidance schemes;
- duty to notify the regulator of significant adverse events;
- arm’s length rules for an investment;
- promotion of illegal early release schemes.
- Allowing the SMSF to wind-up – following a contravention, the trustee may decide to wind-up the SMSF and rollover any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority (APRA). Depending on the actions of the trustees and the type of contravention, the ATO may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance treatments.
- Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance by the ATO. A notice of non-compliance is effective for the year it is given and all subsequent years. A fund remains a non-complying fund until a notice of compliance is given to the fund.
- Freezing SMSF assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.
Informal arrangements
The ATO says it may take one or several courses of action, depending on how serious the contravention is and the circumstances involved. In some circumstances, the ATO may enter into an informal arrangement with a trustee to rectify a minor contravention within a short period of time. The arrangement can be made verbally or in writing and includes how and when the contravention will be rectified. The ATO will consider the trustee’s compliance history in deciding whether to accept the arrangement. The ATO may also provide trustees with informal education about their trustee obligations.
ATO identification of risk posed by SMSFs
The ATO will apply a risk-based approach in response to auditor contravention reports (ACRs). The Commissioner said he will consider multiple indicators and use risk models to determine the appropriate action to take on each SMSF. The key indicators used will include non-compliance (including regulatory and income tax matters), information from the SMSF annual return, ACRs, and other data, including trustee and members’ records.
Under this approach, the ATO will treat all ACRs received with an audit, phone call or letter, shortly after lodgment, to provide more certainty to trustees. The ATO said this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, warranting less intrusive action in many cases.
The ATO’s risk categories for SMSFs include the following:
- High-risk SMSFs – will be selected for comprehensive audits that will see scrutiny of all regulatory and income tax risks displayed by the fund. There will be a particular focus on repeat offenders. This program will also involve an increasing number of ATO field visits to engage high-risk SMSFs. ATO administrative penalties for breaches by an SMSF trustee (up to $10,200 per breach) will be applied when the Commissioner confirms the breach is eligible for such a penalty.
- Medium-risk SMSFs – the ATO will take less intrusive action on SMSFs assessed as medium risk. As trustees are responsible for their fund’s behaviour, the ATO says it will engage directly with trustees to discuss the reported contravention, remind trustees of their obligations, and encourage compliance in future. This action will usually occur within six to eight weeks of the ACR lodgment. In the majority of cases, if the trustee can assure the Commissioner that they understand their obligations, the issues reported in the ACR will be closed and no penalties applied. The ATO’s aim is to intervene before more serious comprehensive audits are required.
- Lower-risk SMSFs – will be issued with tailored correspondence reminding the trustees of their obligations and encouraging compliance in future. The issue reported in the ACR will be closed with the issuing of this letter which will usually occur within six to eight weeks of the ACR’s lodgment.