• How we deal with non-compliance

    Our main focus is encouraging SMSF trustees to comply with the super laws, but there are occasions when stronger responses are warranted.

     

    Duration 2:07. A transcript of What happens if your fund breaches the law is also available.

    To ensure a fair and reasonable outcome in each case, decisions are made according to the statements and principles set out in the:

    • Taxpayers' Charter, which requires that taxpayers be treated fairly and reasonably
    • Compliance model, which helps in understanding the factors and attitudes that motivate a taxpayer to comply or not comply with the law
    • Good decision-making model, which requires that the decision is legal, ethical, equitable, overt, sensible, timely, and in accordance with the principles of natural justice.

    The following courses of action are available to us to deal with SMSF trustees who have not complied with super laws:

    Education direction

    We may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws.

    The education course is designed to improve the competency of SMSF trustees, improve their ability to meet their regulatory obligations and reduce the risk of trustees contravening the law in the future.

    To comply with the direction, trustees will need to complete the education course within a nominated timeframe online – through approved providers under Approved education courses.

    Trustees are required to provide evidence they completed the course and also sign and retain a Trustee declaration confirming they understand their obligations as a trustee of an SMSF. This should be done no later than 21 days after completing the course of education.

    A person who fails to comply with an education direction is liable to pay an administrative penalty of $900.

    Enforceable undertaking

    An SMSF trustee may initiate in writing an undertaking to rectify a contravention. We can decide to accept this or not.

    An undertaking must be sent to us in writing and include:

    • a commitment to stop the behaviour that led to the contravention
    • the action that will be taken to rectify the contravention
    • the timeframe to rectify the contravention
    • how and when the trustee will report that the contravention has been rectified
    • the strategies to prevent the contravention from occurring again.

    We will consider the following factors when deciding if we will accept the undertaking:

    • the compliance history of the trustee
    • the nature of the contravention
    • whether the contravention can be rectified, and when and how this will be done
    • whether the contravention resulted in criminal consequences.

    We will write to the trustee and advise if the undertaking has been accepted or not.

    We may take further action if the SMSF trustee substantially fails to comply with the terms of the undertaking.

    See also:

    Rectification direction

    We may give a trustee or a director of a corporate trustee a written direction to rectify a contravention of the super laws.

    A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide evidence of compliance with the direction. Rectification generally involves putting into operation managerial or administrative arrangements that could reasonably be expected to ensure that there are no further contraventions of a similar kind.

    A person who fails to comply with the direction commits an offence of strict liability. It can also lead to the trustee or director being disqualified or the fund’s complying status being removed, which may result in a significant tax penalty on the fund.

    A trustee may request us to vary the direction. The request must be made in writing on or before the period specified in the direction, be signed and dated and set out the reasons for making the request.

    A trustee may also object to our decision to give a rectification direction or to our decision to refuse to vary a rectification direction.

    Administrative penalties

    Individual trustees and directors of corporate trustees are personally liable to pay an administrative penalty from 1 July 2014 if they contravene the following provisions of the Superannuation Industry (Supervision) Act 1993 (SISA).

    Table: SISA provision and associated penalty

    Provision in SISA

    Description

    Administrative penalty

    Subsection 34(1)

    Operating standards

    20 penalty units

    Subsection 35B(1)

    Accounts and statements

    10 penalty units

    Subsection 65(1)

    Lending to members and relatives

    60 penalty units

    Subsection 67(1)

    Borrowings

    60 penalty units

    Subsection 84(1)

    In house assets

    60 penalty units

    Subsection 103(1)

    Duty to keep minutes

    10 penalty units

    Subsection 103(2)

    Duty to keep minutes of meetings

    10 penalty units

    Subsection 103(2A)

    Retention of copy of section 71E election

    10 penalty units

    Subsection 104(1)

    Duty to keep records of changes of trustees

    10 penalty units

    Subsection 104A(2)

    Declaration of recognition of obligations and responsibilities

    10 penalty units

    Subsection 105(1)

    Duty to keep and retain member or beneficiary reports

    10 penalty units

    Subsection 106(1)

    Duty to notify of significant adverse events

    60 penalty units

    Subsection 106A(1)

    Duty to notify of change in status of entity

    20 penalty units

    Subsection 124(1)

    Written appointment of investment managers

    5 penalty units

    Subsection 160(4)

    Education direction

    5 penalty units

    Subsection 254(1)

    Information to be given to the Regulator

    5 penalty units

    Subsection 347A(5)

    Participation in the Regulator’s statistical program

    5 penalty units

    * The value of a penalty unit is $180.

    The penalty cannot be paid or reimbursed from the assets of the fund.

    Directors of corporate trustees are jointly and severally liable to the penalty. Individual trustees are each liable to the penalty.

    Penalties may be wholly or partially remitted depending on the circumstances of each case.

    Administrative penalties may also be imposed on SMSF trustees if they make false and misleading statements to us.

    See also:

    Disqualification of a trustee

    The ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened super laws.

    If we are concerned with the actions of an individual or their suitability to be a trustee, we can disqualify them. When deciding whether to disqualify a trustee, we take into account how serious the contraventions are, how many contraventions have occurred and how likely it is they will continue to be non-compliant.

    An individual may be disqualified as an SMSF trustee for not being a ‘fit and proper person’. Personal character is considered along with the circumstances surrounding any contraventions.

    We will write to disqualified trustees detailing our decision. This information is published in the Government Notices GazetteExternal Link. Individuals that have been disqualified from being an SMSF trustee can apply to have the decision reviewed.

    When an individual is notified they have been disqualified as a trustee or director of the corporate trustee, they must remove themselves from this role.

    It is an offence for a person to continue to act as a trustee or director of the corporate trustee if they have been disqualified. Further penalties may apply.

    See also:

    Civil and criminal penalties

    We may apply through the courts for civil or criminal penalties to be imposed.

    Civil and criminal penalties apply where SMSF trustees have contravened provisions concerning:

    • the sole purpose test
    • lending to members
    • the borrowing rules
    • the in-house asset rules
    • prohibition of avoidance schemes
    • duty to notify the regulator of significant adverse events
    • arm's length rules for an investment
    • promotion of illegal early release schemes.

    The severity of the contravention, the circumstances that led to the contravention and the actions of the individuals involved will be taken in to consideration before instigating civil or criminal prosecution action.

    Allowing the SMSF to wind up

    Following a contravention, the trustee may decide to wind up the SMSF and rollover any remaining benefits to an Australian Prudential Regulation Authority (APRA) regulated fund.

    Depending on the actions of the trustees and the type of contravention, we may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance treatments.

    Notice of non-compliance

    Serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance. In this case the fund remains non-compliant until a notice of compliance is given to the fund.

    We will consider the following factors when deciding whether to issue a notice of non-compliance:

    • The tax consequences in making an SMSF non-complying and the financial impacts this would have.
    • The seriousness of the contravention, including
      • trustee’s behaviour
      • the effect the contravention has on the SMSF’s assets
      • the number and duration of contraventions.
       
    • All other relevant circumstances, including
      • if the trustee has rectified the contravention
      • the trustees’ level of skill and knowledge
      • the compliance history of the fund
      • the events which led to the contravention.
       

    Making a fund non-complying can have a significant financial impact on the SMSF because:

    • for every year that the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate
    • in the year that it becomes non-complying, it includes in its assessable income an amount equal to the market value of the fund's total assets less any contributions the fund has received that are not part of the taxable income of the fund.

    See also:

    Freezing an SMSF’s assets

    The ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.

    The notice may direct the trustee or investment manager not to acquire assets, not to dispose of assets or to deal with assets in a particular way. We may also give a similar written notice to a person, other than a trustee or investment manager, who has possession, custody or control of an asset of the fund.

    See also:

    The new administrative penalty regime: the ATO's new stick

    Last modified: 26 Oct 2015QC 42478