What does the ATO consider if a breach occurs?
If an SMSF has breached SIS legislation, the ATO will be looking at a number of factors before it issues a penalty notice, says a leading SMSF specialist.
At the recent Heffron Super Intensive Day, Annie Dawson, senior SMSF technical specialist for Heffron, said there are a number of things the ATO will ask its officers to investigate before it issues an administration penalty.
“The officers will want to look at whether there were circumstances for the breach that were beyond the control of the trustee,” Ms Dawson said.
“They will look at whether those circumstances caused the breach and prevented the trustee from complying with their obligation.
“They will also consider whether this then impacted on the trustee’s ability to rectify the breach.”
Ms Dawson said in her experience, there are situations where the breach has occurred due to circumstances beyond the trustee’s control, often because there has been a third party involved in the transaction, or unforeseen issues with the trustee themselves.
“They may have temporary incapacity because of medical issues or mental health issues,” she said.
However, she warned that trustees should never play the card of the “passive trustee”.
“[They should never] say they didn’t know or they weren’t involved because they should know. They should be involved because they’ve agreed to be a trustee,” she said.
The other thing that will be considered by the ATO is whether the trustee exercised the same degree of care, skill and diligence as a prudent person.
“It’s a pretty high bar. It’s not enough to say ‘but I really tried’,” she said.
“The test is what would a reasonable, prudent person do in those cases?”
She said she has had clients who were acting on advice, which later was discovered was incorrect and that can also be raised to the ATO.
“The last thing to remember is that penalties cannot cause unjust results,” she said.
“When the ATO officer is working out what to charge, they’ll take into account whether there’s been a single event or multiple events.
“A single event can be something such as a member deciding to take money from the fund to buy a car and even if they take the money out in three transactions, the ATO will still regard that as a single event.
“So potentially, even though cumulatively, you could get three lots of penalties because there have been three withdrawals, the guidance is to consider it as one event.
“Sometimes there can be multiple breaches, more than one section impacted, and again, if the cumulative penalties are unjust the ATO may in fact remit just to one of those sections.
“But it is important that the intention of the trustee is relevant in helping the ATO determine which section is most relevant.”
Ms Dawson said it is important that trustees and their advisers think about things that they could put in place to prevent the recurrence of a breach.
“Sometimes, if you’ve got one recalcitrant trustee, maybe think about getting rid of that trustee. Or maybe a nuclear option would be offered to wind up the fund and roll over to a retail supplier or a retail super fund because then from the ATO’s perspective, you’re reducing the risk of future breaches from the SMSF angle,” she said.
“Think about preventative measures that you could put in the rectification proposal. The timeframe also needs to be reasonable.
“When you’re working with your client, tell them these are the options that you might be able to use to fix it.”
