1. SMSF Compliance Generally
Many accountants and SME advisors will be familiar with the administrative obligations imposed on self-managed super funds (SMSFs) under the Superannuation Industry (Supervision) Act 1993 (SIS Act).
Unfortunately, in the course of identifying their work for a client's SMSF, advisors may become aware of administrative breaches of the SIS Act, arising as a result of the actions of a trustee, reliance on previous advice, or other matters that may have simply slipped through the cracks of audits to date.
In these circumstances, the trustee, tax agent, accountant, financial planner, lawyer and/or fund administrator acting on behalf of SMSF trustees can utilise the Australian Taxation Office's (ATO) voluntary disclosure service.
Utilising this service prior to the mandatory reporting of a contravention by a SMSF auditor, and prior to any potential ATO investigation, can be particularly beneficial when making submissions to the ATO about the remission of penalties and/or interest.
2. Administrative penalties in relation to SMSFs
Administrative penalties are imposed pursuant to section 166 of the SIS Act in the form of penalty units. Administrative penalties can range anywhere between 5 to 60 penalty units per contravention as follows:
|
Provision
|
Contravention
|
Penalty Amount
(for infringements on or after 7 November, $330 penalty unit amount)
|
|
5 Penalty Units
|
|
Subsection 124(1)
|
failure to make a written appointment of investment managers
|
$1,650
|
|
Subsection 160(4)
|
failure to comply with an education direction
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$1,650
|
|
Subsection 254(1)
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failure to give information to the prescribed regulator
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$1,650
|
|
Subsection 347A(5)
|
failure to participate in the regulator’s statistical program
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$1,650
|
|
10 Penalty Units
|
|
Subsection 35B(1)
|
failure to prepare accounts and statements
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$3,300
|
|
Subsection 103(1)
|
failure to keep minutes for at least 10 years
|
$3,300
|
|
Subsection 103(2)
|
failure to keep minutes of meetings for at least 10 years
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$3,300
|
|
Subsection 103(2A)
|
failure to retain a copy of section 71E election
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$3,300
|
|
Subsection 104(1)
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failure to keep records of changes of trustees for at least 10 years
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$3,300
|
|
Subsection 104A(2)
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failure to declare recognition of obligations and responsibilities
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$3,300
|
|
Subsection 105(1)
|
failure to keep and retain member or beneficiary reports for at least 10 years
|
$3,300
|
|
20 Penalty Units
|
|
Subsection 34(1)
|
failure to comply with operating standards
|
$6,600
|
|
Subsection 106A(1)
|
failure to notify of change in status of entity
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$6,600
|
|
60 Penalty Units
|
|
Subsection 65(1)
|
lending SMSF funds to members and relatives
|
$19,800
|
|
Subsection 67(1)
|
borrowing money or maintaining an existing borrowing of money
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$19,800
|
|
Subsection 84(1)
|
failure to comply with in-house assets rules
|
$19,800
|
|
Subsection 106(1)
|
failure to notify of significant adverse events
|
$19,800
|
Importantly, an administrative penalty imposed under section 166 of the SIS Act is a liability of the trustee of the relevant SMSF (or director(s) of the trustee, if the trustee is a corporation), and the penalty amount cannot be paid or reimbursed from the assets of the SMSF.
If a SMSF receives an administrative penalty, the trustee (or director(s) of the trustee, as the case may be) is/are required to pay the penalty within 14 days after notice has been given by the Commissioner of Taxation (Commissioner).
In addition to these administrative penalties, if a trustee fails to pay its administrative penalties within the required time, the trustee will incur an additional general interest charge (GIC) on the amount of the outstanding penalty.
The GIC rates are reviewed by the ATO quarterly, however the GIC is calculated on a daily compounding basis on the overdue amount, therefore increasing your GIC liability. As such, how much a trustee/SMSF is liable for is determined on a case-by-case basis.
Note that GIC will no longer be deductible from 1 July 2025. Charges that are incurred in income years starting on or after 1 July 2025 will not be deductible, irrespective of whether the tax liability to which the interest charges relate arose before or after 1 July 2025.
3. Reporting administrative contraventions
An approved SMSF auditor or actuary is obligated to report contraventions of the SIS Act to the ATO within 28 days of completing an audit (where they become aware of such contraventions).
The ATO can also initiate an SMSF audit at any time, which may also unearth contraventions.
Accordingly, the risk of contraventions being uncovered is high. If you become aware of a client's SMSF being in contravention of the SIS Act, it is important to consider making a voluntary disclosure as quickly as possible.
4. Voluntary disclosures and the remission of administrative penalties
The collection and remission of administrative penalties imposed under the SIS Act are dealt with in the Taxation Administration Act 1953 (Cth) (TAA) under Schedule 1, Division 298.
Relevantly, subsection 298-20 of Schedule 1 to the TAA, provides the Commissioner with the power to remit all or part of an administrative penalty.
Voluntary disclosures are actively encouraged by the ATO and making a timely disclosure using the ATO's voluntary disclosure service can have a significant impact on the remission of administrative penalties.
Voluntary disclosures can be made by a SMSF:
- when a contravention occurs but before any notice of non-compliance or notice of an ATO audit is received; or
- upon notice by the ATO that it intends to commence an investigation into the SMSF but before the investigation is completed.
When lodging a voluntary disclosure with the ATO, an SMSF 'regulatory contravention disclosure form' must be completed and submitted attaching all relevant facts, supporting documentation and a rectification proposal or proposed enforceable undertaking.
Helpfully, the Commissioner has released Practise Statement Law Administration 2020/3 (PSLA 2020/3) which provides a guideline for the administration of penalties imposed under section 166 of the SIS Act and what factors the Commissioner will consider when determining if a remission is appropriate in the circumstances.
In considering whether a remission of an administrative penalty is appropriate, the Commissioner will have regard to the following factors;
(a) the purpose of the penalty provision;
(b) the trustee's behaviour and circumstances;
(c) the seriousness of the contravention;
(d) whether multiple penalties are being imposed;
(e) whether there are multiple breaches of the same provision;
(f) whether multiple different provisions have been breached; and
(g) whether the prescribed penalty amount is unintended or unjust.
PLSA 2020/3 also tells us that where a voluntary disclosure is made to the ATO prior to any initial contact from the ATO, the Commissioner will consider the voluntary disclosure and the compliance of the SMSF with the ATO in carrying out its investigations when determining how much to remit (if it is appropriate).
Specifically, PSLA 2020/3 in Example 11 sets out how the Commissioner will approach a breach of a SMSF which contravenes the SIS Act by borrowing money but where a voluntarily disclosure was made prior to ATO contact. Briefly, Example 11 states:
(a) Willow and Daniel are members and trustees of the Theme SMSF, a regulated SMSF.
(b) Willow determines that Theme SMSF should acquire an asset.
(c) Willow advances the required money to repay the amount with the intention that the SMSF will repay that amount at a later date.
(d) Willow receives advice from an accountant, one month later, that an SMSF may not borrow outside limited exceptions and makes a voluntary disclosure to the ATO.
(e) When contacted by the ATO, the trustees were compliant and provided all required information and agreed to rectify the contravention by repaying the borrowing.
(f) Each trustee was required to pay administrative penalties of 60 penalty units ($19,800).
(g) The Commissioner accepted that there was cause for a significant remission of penalties on the following grounds:
- The trustees acted as soon as they became aware of the contravention by repaying the borrowing;
- The trustees promptly engaged the ATO by lodging a voluntary disclosure of the contravention; and
- The trustees had a good compliance history.
Whilst the making of a voluntary disclosure is not the only matter the Commissioner will consider when making a determination about the remission of administrative penalties, it is a significant factor that greatly assists Willow and Daniel in the above example.
5. Voluntary disclosures and remission of the general interest charge
The remission of any GIC imposed as a result of a section 166 administrative penalty is separately dealt with pursuant to section 8AAG of the TAA.
Section 8AAG of the TAA outlines when the Commissioner may determine if a remission of the GIC is appropriate. The criteria are as follows:
- the person did not cause the GIC accruing and they have attempted to mitigate the situation;
- the person caused the GIC accruing, they have attempted to mitigate the situation, and it would be fair and reasonable to remit;
- there are special circumstances making it fair and reasonable to remit; or
- it is otherwise appropriate to remit.
It is important to keep in mind that the GIC is set at a higher rate to encourage people to pay their tax debts promptly and save on ATO resources. As a result, the Commissioner will only remit a trustee's GIC in limited circumstances.
Helpfully, the Commissioner has released Practise Statement Law Administration 2011/12 (PSLA 2011/12) which provides guidance on the remission of the GIC.
The Commissioner notes that the GIC may be remitted if
- The circumstances leading to the delayed payment are not the trustee's fault; and
- The trustee has taken all reasonable steps to mitigate or mitigate the effects of those circumstances.
The type of external circumstances acceptable to the Commissioner are relatively limited to unique circumstances beyond the control of the taxpayer such as natural disasters, ill health etc. Accordingly, these circumstances may not be applicable to many SMSF trustees.
However, where the delay in payment is caused by the SMSF trustee, the Commissioner may remit the GIC when it would be fair and reasonable to remit or if there are special circumstances warranting remission.
What is fair and reasonable is deemed by the Commissioner to be what an ordinary and reasonable member of the community who pays their taxes on time would see as circumstances where it would be fair and reasonable to remit.
What constitutes special circumstances will be considered by the Commissioner on a case-by-case basis, this may include the Trustee's payment history and whether the delay is the result of an isolated occasion or multiple contraventions.
Accordingly, a voluntary disclosure can include submissions regarding extenuating circumstances that may justify a remission of any GIC at the same time as seeking a remission of the primary administrative penalty liability.
6. Making a voluntary disclosure
If you are concerned that you or your client has contravened the SIS Act, we recommend seeking legal advice in relation to lodging a voluntary disclosure as soon as possible.
