As we all know, sometimes unexpected events occur, including contraventions of super law for self managed super funds (SMSFs). The secret is to be prepared and know who can help. Contraventions that have either been detected or reported to the Australian Tax Office (ATO) through an auditor contravention report (ACR), or which are likely to be picked up next audit, are scary at first, but can often be managed to minimise the detrimental effects.
Around 11,000 ACRs were issued in the last financial year (2013-14) and with the new power of the ATO to impose penalties the need to address these issues, and address them promptly, is magnified. The ATO has made it clear that super fund trustees identifying and actively addressing contraventions will be viewed favourably. The regulator of SMSFs has advised that every ACR will be risk assessed by the ATO as low, medium or high.
Low, medium or high risk
Low risk assessment means that the ATO is likely to deal with the contravention by a letter or phone call to the trustee. This is intended to occur within eight weeks of the ATOs receipt of the ACR from the fund auditor.
One important tip here: don’t talk to the ATO if you’ve got an accountant or financial adviser who can do this for you. Don’t be like the client who told the ATO officer he had no idea about his super fund because his wife handled this, and then suddenly found himself disqualified as a trustee and their super fund removed from Super Fund Lookup.
Medium risk assessment means that the ATO is likely to make a phone call to the trustee (not the financial adviser) in order to discuss the contravention/s. The same advice applies here as in the previous tip: don’t talk to the ATO until you’re prepared.
High risk assessment means that the SMSF is likely to receive a comprehensive/full audit in order to assess whether there are additional issues which may need to be addressed.
Your response is more important than the breach
The ATO has advised that the breach is not the problem; a fund with an ACR is better off than one without when a contravention has occurred. Rather, what the trustee needs is a plan to identify all aspects of the contravention, consider appropriate courses of action and take those steps to address the breaches. Notifying the ATO how you intend to proceed is critical. The six top breaches are:
- loans to members – 21 per cent by number and 15 per cent by value
- in house assets – 19 per cent by number and 28 per cent by value
- separation of assets – 13 per cent by number and 26 per cent by value
- administrative breaches – 11 per cent by number and 2 per cent by value
- borrowing breaches – 8 per cent by number and 7 per cent by value
- sole purpose test breaches – 8 per cent by number and 5 per cent by value.
The first two and the last two in the above list may in future attract the maximum penalty of $10,200 per trustee. The others may, depending on the facts, attract lesser or even no penalty other than a warning. Auditors themselves are also under scrutiny.
The ATO has made clear that auditors are the ATO’s private law enforcement arm: the ATO depends on their accuracy and independence to provide trustees with an assessment of the financial and compliance state of their SMSFs and to provide the ATO with information on reportable contraventions. This year the ATO says it will contact about 1,000 SMSF auditors where it has concerns about some aspect of their behaviour.
The ATO will also review and audit about 165 auditors including a small number of high-volume auditors to confirm that they are undertaking proper and comprehensive SMSF audits. The ATO appears particularly concerned with catching trustees who intentionally break the rules as opposed to those who do so negligently or inadvertently. Negligence and inadvertence can be dealt with through trustee and auditor education. Intention is tantamount to criminality and could cover such things as dividend washing and stripping or aggressive tax planning arrangements.
Auditors who assist funds to intentionally breach the rules can expect their registration to be short-lived.
Breaches can be managed and the effect minimised in many different ways, but it is important that the trustee act quickly. The worst thing to do is sit on the issue and hope it goes away. Guess what? It won’t.
