ATOs powers to address SMSF compliance breaches

The ATO has a number of options available to deal with SMSF compliance breaches:

  • Education Directions
  • Rectification Directions
  • Administrative Penalties
  • Enforceable Undertakings
  • Allowing an SMSF to wind-up
  • Disqualifying Trustees
  • Freezing SMSF assets
  • Issuing a Notice of Non-Compliance
  • Civil and Criminal Penalties

Education Directions, Rectification Directions and Administrative Penalties

I have covered the education and rectification and administrative penalties in another article, however the ATOs recent publication does provide some clarity about how these powers will be used. As a fee cannot be charged for the course of education it seems the ATO is favoring online courses. The ATO will require the trustees ‘attend’ the ATO webinar Self-managed super funds for trustees – an overview, or other online courses from external approved providers.

I would have expected more from a direction empowered by legislation to impose a course of education on trustees whose breaches of the SIS Act and regulations have been sufficient to come to the attention of the ATO. The requirement that no fee could be charged for the course, even one payable by the trustees individually with no ability to be reimbursed from the fund, was always going to limit course options. However, given the legislation does prohibit the SMSF from reimbursing the trustees for the costs of attending the course of education, what was envisioned was likely more substantive than a one hour webinar.

Additionally the ATO has set out some of the factors that will be considered in deciding to impose a rectification direction:

  • The nature and seriousness of the contravention
  • Any financial detriment that might reasonably be expected to be suffered by the fund as a result of a person’s compliance with the direction
  • Other relevant circumstances

You can find a table of the admin penalties and associated fines the the article: New powers for ATO to address SIS Contraventions.

Enforceable Undertaking

As the ATOs now has the power to issue rectification directions it would not be surprising if enforceable undertakings diminished in use – given that they cannot be initiated by the ATO, but need to be presented for acceptance of the Commissioner of Taxation by the trustees of the fund. The ATO takes the following into account when deciding to accept or reject an enforceable undertaking:

  • The trustee/s compliance history
  • The nature of the contravention
  • If the contravention can be rectified
  • If there are criminal consequences of the contravention

Disqualification of a Trustee

The ATO has the power to disqualify a person from being the trustee of an SMSF, or the director of a corporate trustee of an SMSF. The ATO may impose this penalty when “we are concerned with the actions of an individual or doubt they are suitable to be a trustee”, and will take into account:

  • How serious the contraventions are
  • How many contraventions have occurred
  • How likely it is the fund will continue to be non-compliant

Such a disqualification is made public as it is published in the Government Notices Gazette. More details about the ATOs process of deciding to disqualify an SMSF trustee can be found in PS LA 2006/17.

Allowing the SMSF to wind-up

If, following a contravention, the trustees of the SMSF decide to wind-up the fund and rollover any remaining benefits to an APRA fund the ATO may or may not continue action against the fund or the trustees.

Further detail to this is provided in PS LA 2006/19, which states that a notice of non-compliance will generally not be issued where the fund is wound up “prior to any ATO compliance action”, though the practice statement does say that where the compliance breaches warrant it a non-compliance notice may be issues to a fund that has been wound-up.

Freezing of an SMSFs Assets

The ATO also has the power, under s264 of SISA to issue a notice to ‘freeze’ either all the assets of the fund, a class of assets, or a specific asset where the “conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent”.

Notice of Non-Compliance

Issuing a Notice of Non-Compliance, making a fund non-complying, can “have a significant financial impact on the SMSF” per the ATO website, as the fund “loses tax concessions” and the fund’s “income, including the total assets less any member contributions where no tax deduction has been claimed, will be taxed at 45% for the relevant period that the SMSF was made non-complying”. Before deciding to take this step the ATO has said that the following factors will be taken into consideration:

  • The tax consequences in making an SMSF non-complying and the financial impacts this would have
  • The seriousness of the contravention, including:
    • trustee’s behavior
    • the effect the contravention has on the SMSFs assets
    • the number and duration of contraventions
  • If the trustee has rectified the contravention
  • The trustees’ level of skill and knowledge
  • The compliance history of the fund
  • The events which led to the contravention

More detail of the ATO processes for issuing a Notice of Non-Complying Status can be found in PS LA 2006/19.

Civil and Criminal Penalties

SISA s193 contains a list of the sections which are ‘civil penalty provisions’, including the following sections relevant to SMSFs:

  • s62(1) – Sole Purpose Test
  • s65(1) – Lending to members
  • s67(1) – Borrowing
  • s68B(1) – Promotion of illegal early release schemes
  • s84(1) – In-house asset rules must be complied with
  • s85(1) – Prohibition of avoidance schemes (In-house Assets)
  • s106(1) – Duty to notify the Regulator of significant adverse events
  • s109(1) & 109(1A) – Investments of superannuation entity to be made and maintained on arm’s length basis

The ATO can pursue civil and criminal penalties in relation to these sections, based upon:

  • The severity of the contravention
  • the circumstances that led to the contravention
  • the actions of the individuals involved

 

More details about the ATOs power to enforce SMSF compliance, and punish or prevent breaches, can be found in the ATO publication: Dealing with non-compliance by SMSF trustees.

 

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