Rectification directions – ATO PS LA 2023/1

The ATO has various powers it can exercise to deal with SMSF non-compliance. One such power is to provide a rectification direction (RD) to an SMSF trustee under s 159 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).

Guidance on RDs is provided to ATO officers in Law Administration Practice Statement 2023/1 (PSLA).

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Referring to the information in the PSLA, this article outlines what a RD is, why and when these are likely to be issued by the ATO and the implications of failing to comply with such a direction.

What is a rectification direction?

A RD is a written notice the ATO gives to an SMSF trustee/director requiring them, within a given time period:

To take specified action to rectify a contravention (e.g. to repay a loan or borrowing, dispose of an asset or lodge a return), and
To provide the ATO evidence showing compliance with the direction.

The term ‘rectify’ includes putting in place managerial or administrative arrangements to ensure there will be no further contraventions of a similar kind, e.g. including preventative measures, controls and corrective action aimed at minimising the risk of future contraventions.

For simplicity we refer to SMSF trustee below rather than SMSF trustee/director.

Considerations

When can a RD be given?	Where there is reasonable belief that a person has contravened a provision of the SISA or the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR).
Considerations of giving a RD	The following factors may attract varying weight depending on the circumstances of the case: · Whether compliance with the direction that might result in financial detriment for the fund. · The nature and seriousness of the contravention. · The person’s behaviour, circumstances, and compliance history: o Behaviour: A RD is seen as appropriate where the contravention was due to insufficient trustee knowledge and less appropriate where the behaviour involves recklessness or an intentional disregard of trustee obligations. o Compliance history: A RD is seen as more appropriate where the fund had a good compliance history and less appropriate where a fund has a poor compliance history. · Other relevant circumstances: o Capability of trustees: The ATO would assess whether the person given a direction can effectively implement or perform the requested actions. o Prior education directions: Where a person has been given a prior education direction, it might be more appropriate to take firmer compliance action. o ATO compliance actions: Where the trustee has not rectified a reported contravention, an SMSF trustee is more likely to be given a RD.
Time restraints on compliance	The period given for a RD should be reasonable in view of the fund’s circumstances. The following factors should be considered: · Whether professional advisers are involved; · The abilities and constraints of the person; and · The complexity and nature of the required actions. Generally, a time frame of up to 6 months is seen as adequate to rectify contraventions; with up to 12 months in ‘extreme’ circumstances.
Varying or revoking a direction	A RD can be varied by the ATO, and a person can also request a variation. If the ATO does not respond within 28 days after the request is made, the request is deemed to be refused.
Failure to comply	Non-compliance with a RD will not result in an administrative penalty, however, other compliance options may apply. Failure to comply within the stipulated time limit can result in an offence of strict liability which currently carries a maximum of $2,750 (i.e., 10 penalty units and from 1 January 2023 a penalty unit is $275; thus 10 x $275 = $2,750).

Other ATO compliance action

Other compliance options may be used alongside a RD depending on the appropriateness in the circumstances. Other options include administrative penalties and giving an education direction.

RDs would generally not be given where:

the ATO is disqualifying an individual and prohibiting them from acting as an SMSF trustee/director.
A notice of non-compliance is being issued.
Action is being taken to wind up the fund.

Also, RDs are not to be given where the ATO receives an enforceable undertaking covering the contravention.

Enforceable undertakings

An enforceable undertaking is where an SMSF Trustee provides undertakings to the ATO on the rectification steps that SMSF trustee will take. These are worth considering prior to the ATO issuing a RD. When accepted by the ATO, an enforceable undertaking becomes an agreement between the SMSF trustee and the ATO. An enforceable undertaking can be a pro-active step by an SMSF trustee putting forward its proposed rectification steps.

Conclusions

RDs provide the ATO with the power to direct an SMSF on what to do (or stop doing) to rectify a contravention. SMSF trustees should seek to comply with such directions or suffer more serious compliance actions.

The use of RDs would usually be preferred to some other compliance actions. However, enforceable undertakings can be another sound option.

Naturally, DBA Lawyers would be pleased to assist and have assisted many SMSFs in relation to ATO compliance matters.