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The nation has been gripped by the very real fear of how COVID-19 will impact our health, our economy and our finances. SMSF trustees are at the pointy end of investment decisions for their superannuation and are extremely concerned that their retirement livelihoods are rapidly slipping through their fingers.
In this kind of environment we hope the Australian Taxation Office will go lightly on any contraventions by SMSFs, particularly if they are unintentional, which is most often the case. But if you do receive an ATO notification regarding a breach by your SMSF it’s important you know what to do.
It can be quite confronting to receive such a notification and it is not unusual for SMSF trustees to wind up their SMSF as a result.
However, the ATO can also be understanding if a trustee indicates they are prepared to fix the problem quickly. So, to help you get back in their good books, we’ve put together the following steps for dealing with any notice you might receive from the ATO.
Step 1: Talk with your auditor
Every superannuation fund needs an audit report from an independent auditor each year when they file their tax return. Auditors are required to report any contraventions they find to both the SMSF trustee and the ATO. Your auditor will be the first external person to know of a contravention and, having possibly dealt with contraventions before, may be able to give you some idea of what the ATO might do and your possible course of action. This could give you some time to prepare.
Step 2: Research
What you need to do will depend on the type of contravention letter you get from the ATO. SuperGuide has some great articles on the kinds of ATO breaches your SMSF needs to be aware of (and the potential directives the ATO could issue, the laws that apply to SMSFs and your responsibilities as a trustee).
Step 3: Work with the ATO
Even if your fund has a contravention reported by your auditor to the ATO, the most likely outcome is that you will be able to work with the regulator to rectify the problem.
In the 2019 financial year there were nearly 27,719 contraventions reported for 10,330 SMSFs (excluding directions to educate) but the ATO only needed to take proactive enforcement action (that is, disqualify a trustee, make a fund non-complying, impose administrative penalties, enforceable undertakings and issue directions to rectify) for less than 500, or 5%, of those SMSFs. The remainder worked voluntarily with the ATO to rectify the problem.
|Direction to educate (trustees)||32||45||95|
|Direction to rectify||31||34||74|
|Notice of non-compliance||11||26||21|
|Disqualified trustees (funds)||169||103||91|
|Number of SMSFs with penalties imposed||100||146||84|
|Net admin penalties raised||$1.7m||$3.1m||$3.3m|
Source: ATO as at 20 February 2020
Step 4: Weigh up your options
Educational directions and rectification directions are not as harsh as some of the other avenues available to the ATO. They instruct SMSF trustees to either fix a problem or educate themselves on the responsibilities of being a trustee around a problem. These are the most common contravention notices that the ATO has been issuing recently.
Graeme Colley, Super Concepts Executive Manager, SMSF Technical & Private Wealth, recalls one case in which an SMSF trustee was unaware that its SMSF contravention could result in the fund being taxed at 45% instead of concessionally taxed at 15% like all superannuation funds. That trustee had contravened the in-house asset rules by investing in a family unit trust by much more than the statutory 5% permitted under the in-house asset rules. The ATO issued an enforceable undertaking for the trustee to rectify the issue within six months.
“This occurred as it frightened the client that the fund could be taxed as a non-complying fund,” Colley says.
In a speech to the SMSF Association National Conference in late February, Dana Fleming, ATO Assistant Commissioner, SMSF Segment, called these above actions ‘remedial enforcement’ actions (directions, enforceable undertakings and administrative penalties) or actions designed to “foster trustee re-engagement and ongoing compliance”.
More severe transgressions are likely to receive non-compliance notices, trustee disqualifications and civil and criminal penalties. These are what Fleming calls ‘removal’ enforcement actions. They are intended to remove wayward trustees and their SMSFs from the concessionally taxed environment.
Step 5: Comply with the directive and/or wind up your fund
If the ATO issues a ‘removal’ enforcement action it expects the SMSF will be wound up. A trustee disqualification means a trustee is no longer able to operate an SMSF and a wind-up is the only course of action. For non-compliance cases the cost involved in making the fund compliant may be too much for the fund and it could choose to wind up instead.
Take the example of an SMSF being used as a cash supply for an individual who had not yet reached their preservation age. If the fund’s balance was relatively low, the trustee could decide to wind the fund up instead of rectifying the breach of both the sole purpose test and the preservation standards.
The ATO says that the most common contraventions involve:
- Loans 21.1%
- In-house assets 18.5%
- Separation of assets 12.7%
The good news is that most trustees work with the ATO to rectify contraventions before they even get to the stage of issuing a directive. So, as long as you don’t behave in a manner that shows a blatant disregard for the law, or intentionally seek to misuse your SMSF to take advantage of lower tax rates, chances are you won’t get a blemish on your SMSF trust record.