Irina Tan and Bryce Figot from DBA Lawyers explain the intricacies around dealing with the Australian Taxation Office and handling contraventions.
The Australian Taxation Office (ATO) has several options when dealing with contraventions of superannuation law by the trustee of a self-managed superannuation fund (SMSF).
A consistent theme throughout these options, however, is the importance of the dealings of the trustee in relation to a contravention. This article provides some relevant insights.
Non-compliance
The ATO may render an SMSF non-compliant. This usually carries devastating tax consequences.
Once a notice of non-compliance is issued in respect of a fund for a year of income, the SMSF is treated as a non-complying superannuation fund from that income year onwards, unless it is later deemed to be complying.
While an SMSF is non-compliant, it loses its concessional tax treatment and is taxed at the highest marginal tax rate (currently 45 per cent).
The SMSF’s assessable income will also include the market values of the SMSF’s assets just before the start of the income year in which the SMSF has been deemed non-compliant (less the sum of crystallised undeducted contributions after 30 June 1983 and all contributions made after 30 June 2007 that are not to be included in the SMSF’s assessable income).
Further, while non-compliant, the pension exemption is not available.
Interest is also usually payable. The interest accrued can be substantial where the ATO issues the notice of non-compliance in respect of a financial year that has long past. That being said, a request can be made for the ATO to remit the interest.
Process of non-compliance
Many SMSFs are rendered non-compliant pursuant by the following process:
- The SMSF’s auditor lodges an auditor contravention report (ACR). Each year auditors lodge ACRs in respect of approximately 2 per cent of all SMSFs.
- Initially, the ATO is interested in finding out whether there are contraventions by the SMSF trustee. The ATO usually requests documentation, details and evidence of any steps taken by the trustee to rectify any contraventions. If the ATO is satisfied that there are no contraventions, or that any contraventions have been appropriately rectified (which is the case in about half of all ACRs), then the ATO might choose to take no further action. However, the ATO can seek to pursue other courses of action.
- Subject to the information received from the trustee, the ATO might form the view that contraventions did occur. The ATO may have discretion as to whether to issue a notice of non-compliance. If they are considering issuing a notice of non-compliance, they generally explain their reasons and typically provide the trustee the opportunity to submit reasons why the SMSF should not be made non-complying. If the ATO is convinced of such reasons, then the ATO might take no further action.
- If not, the ATO might issue a notice of non-compliance. The ATO usually also notifies the trustee that an amended tax assessment will be issued in due course. The trustee is typically given 21 days to request a review of the decision.
Dealing with the ATO
The ATO issued PS LA 2006/19 which relates to notices of non-compliance. The statement lists and attempts to explain factors that are taken into consideration in deciding whether or not to issue a notice of non-compliance.
Some of these are:
- The behaviour of the trustee in relation to the contravention;
- Whether the trustee has rectified the contravention, entered into an enforceable undertaking to rectify the contravention, or taken any action to prevent the contraventions occurring again; and
- The compliance history of the fund before and after the contravention.
In our experience these are the factors that weigh heavily in the outcome of an ATO decision in relation to a contravention by the trustee of an SMSF.
In light of the first factor above in particular, the trustee should try to rectify any contravention as quickly as possible.
Thus, if an ACR must be lodged, ideally the ACR should be able to confirm the contravention has already been rectified.
If the contravention is not rectified when the ACR is lodged, the trustee should consider offering an enforceable undertaking to the ATO to remedy the contravention.
Acceptance of an enforceable undertaking by the ATO may be an alternative to the fund being rendered non-complying.
However, it is important to note that just because an enforceable undertaking is offered, does not mean that ATO will necessarily accept it.
As set out in PS LA 2006/18 at paragraph 19, in determining whether to accept an enforceable undertaking offered, the ATO will consider whether the contravention can be rectified, the past behaviour of the trustee and the nature and seriousness of the contravention.
Another major factor that the ATO take into account is the time frame offered in any enforceable undertaking.
The longer the time frame offered, the less likely the ATO is to accept it.
This was illustrated in JNVQ and Commissioner of Taxation [2009] AATA 522. In the first enforceable undertaking offered, the trustee proposed to rectify the relevant contravention within 2.5 years, which the ATO rejected.
In the second enforceable undertaking offered the trustee proposed to rectify the relevant contravention within 5 months.
This very short time frame was also rejected by the ATO. The Administrative Appeals Tribunal noted that:
The [ATO] declined each proposal. As appears from the [ATO]’s reasons for refusing these offers, the [ATO] considered the timeframes were set too far into the future.
Further, if a notice of non-compliance has been issued, the trustee is given typically 21 days to request a review of the decision to make the SMSF non-complying. An extension of time may be requested.
Other potential ATO options
An administrative penalty regime is proposed for certain contraventions with effect from 1 July 2013. The ATO will also be given the ability to issue directions to rectify contraventions.
These proposals are meant to allow flexibility in dealing with smaller contraventions of superannuation law.
However this does not mean that a trustee can be passive in relation to a relatively minor contravention.
Firstly, the proposed system is likely to capture more contraventions that were previously not sanctioned due to disproportionately serious consequences.
Secondly, there is still benefit in proactively offering an enforceable undertaking where appropriate.
Thirdly, the notice of non-compliance (and the other existing sanctions) will still also be options for the ATO.
Conclusion
Issues in relation to contraventions of superannuation law should be taken seriously by SMSF trustees. In dealings with the ATO, SMSF trustees should be aware of the importance of the way the contravention is dealt with and address all issues promptly.
Irina Tan is a lawyer and Bryce Figot is a director at DBA Lawyers.
