ATO / Professionals / SMSF / SMSF Compliance

Early engagement with fund compliance breaches

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The ATO has introduced a new service to centralise the way a fund trustee and professionals can notify the ATO of any unrectified fund compliance breaches.

Where a fund has a contravention, it is has always been the case to encourage fund trustees to work with appointed professionals, including the SMSF auditor to rectify any issue as soon as possible, rather than attempting to ‘hide’ the issue (see ‘How ATO deals with non-compliance’).  With greater number of powers now available to the Commissioner (including directive orders) to rectify issues of non-compliance, this ability to engage early with the Regulator is a positive outcome for trustees that are looking to do the right thing.

The following examples have been provided by the ATO to outline how they are likely to approach areas of non-compliance where trustees enter into an early arrangement to voluntarily disclose breaches:

Example 1: Stephens superannuation fund

The Stephens Superannuation Fund bank account was overdrawn twice during the 2014–15 financial year.  After rectifying the breach the trustee engaged an SMSF auditor and disclosed the breaches to ATO via the SMSF early engagement and voluntary disclosure process.

As a result of this breach, the ATO advised the trustees that given the contraventions were rectified, there was no need for them to use the service and by raising the breaches with their approved auditor they had discharged their reporting obligations.  The trustees also put controls in place to prevent the fund bank account being overdrawn in the future.

Given it was a reportable contravention the SMSF auditor lodged an auditor/actuary contravention report (ACR).  As a result of the ACR, the ATO sent an education letter to the fund in relation to the breach.

Example 2: Klein superannuation fund

The approved auditor for trustees Emma and Jonas Klein identified a Limited recourse borrowing arrangement (LRBA) breach in relation to the Klein Superannuation Fund for the 2014–15 financial year.

The breach arose because the Klein Superannuation Fund entered into a LRBA that had not been structured correctly. A holding trust did not hold the property on trust for the fund trustees and the LRBA was with a non-related party. The trustees made a voluntary disclosure of the breach and provided all relevant facts and supporting documentation.  They also provided a proposed undertaking to rectify the contravention within six months.

The trustees actively engaged with the ATO throughout the resolution process and lodged the outstanding returns.  As a result of the trustee’s approach, the ATO accepted the trustee’s undertaking to rectify the contravention.  The terms of the enforceable undertaking were that the property was to be transferred into the holding trust within six months.  SMSF administrative penalties were imposed and remitted in full given that the trustees made a voluntary disclosure.

Example 3: Okafor superannuation fund

The trustees made an SMSF voluntary disclosure that the Okafor Superannuation Fund had not lodged annual returns for four years because all its money was lost in an investment scam.  The trustees made their disclosure prior to the notification of an ATO SMSF review or audit and provided all relevant facts and supporting documentation including bank statements.  The trustees provided an undertaking to wind up the fund and not to act as trustees of another SMSF in the future.

The trustees actively engaged with the ATO throughout the process and the Regulator verified the investment scam claims.  The ATO ultimately accepted the undertaking by the trustees and the SMSF was wound up.

What we learn from the examples

Each example above demonstrates how the Regulator will typically take a co-operative approach with the trustee(s) to fund compliance breaches, in particular where there is a genuine intent to remedy any compliance issues.  Sometimes these events occur through poor judgment by trustees or through advice by professionals, however most importantly where the trustees voluntarily disclose unrectified contraventions before the ATO commence an audit, any such disclosure will be taken into account in determining the enforcement action the ATO may look to take and the appropriate level of remission of administrative penalties.

Where a trustee engages early with the Regulator, the trustees must provide the ATO with all relevant facts, supporting documentation and a rectification proposal or proposed Enforceable undertaking and actively engage with the Regulator throughout the resolution process.

If you make a disclosure about contraventions that occurred in previous years, you must lodge any outstanding SMSF annual returns.

Trustees and professionals can utilise the ATO’s early engagement and voluntary disclosure service when there is a contravention(s) that remain unrectified.  Trustees or their SMSF professionals need to complete the SMSF regulatory contravention disclosure form or apply in writing with the supporting documents.

You can access the SMSF regulatory contravention disclosure form here.

You can watch a recent ATO webinar on the early engagement and voluntary disclosure here, or find out further information on the ATO website.

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