As the name suggests, Contravention Reports are lodged by Auditors, who have an obligation to identify and report non-compliance within an SMSF, which assists in ensuring efficient regulation, oversight and integrity of the SMSF sector.
While not to be taken lightly, there is often a heightened sense of fear and confusion around Contravention Reports – both from Trustees and other financial service providers.
It is important to note that a Contravention Report does not constitute an allegation of wrongdoing or financial impropriety. Rather, it is an evidence-based statement of fact that outlines the specific breach, along with any corrective actions required or already undertaken.
However, it is fair to say that the various breaches that can trigger a Contravention Report are not created equally, and Trustees should be educated about the nuances that exist.
Rectified Breach
A rectified breach occurs when the Trustee has failed to comply with a regulatory requirement – which must then be reported to the ATO via a Contravention Report – however the non-compliance has been corrected.
As an example, if an SMSF member withdraws funds without a valid condition of release, a breach has occurred. If the funds are repaid and the balance is restored – regardless of how quickly this may occur – a Contravention Report must still be lodged, but the auditor will mark it as rectified.
Unrectified Breach
Once a Trustee becomes aware of a contravention, they are obligated to correct it as soon as possible. However, if at the time of an auditor lodging a Contravention Report the matter has not been suitably corrected, the report will be lodged as unrectified. This occurs even if actions have been taken to begin to rectify the breach, although the Contravention Report may identify rectification is in progress.
An unrectified breach may result in closer scrutiny from the ATO, with the potential of penalties, direction to bring the fund back into compliance or, in the case of repeated breaches, disqualification.
Non-Rectifiable Breach
Perhaps the most important Contravention Report to understand is one that is lodged as the result of a Non-Rectifiable Breach, that is a breach that has occurred outside the Trustees control.
Such an example can be highlighted in the complex nature of providing asset valuation. There are times when supporting documentation is unable to be obtained – or may not even exist – such as in the case of comparable data for regional property. In this instance, an auditor would be required to lodge a Contravention Report to notify the ATO that there is a lack of supporting documentation to substantiate the market valuation.
It’s worth noting that in some instances of a non-rectifiable breach, if a Trustee and/or qualified professionals are unable to obtain the documents to satisfy compliance requirements, the ATO is also likely to face the same challenges.
It’s also important to understand that current reporting criteria means Auditors are obligated to report all contraventions exceeding $30,000 or 5% of total fund assets – whichever is lower.
However, this threshold has existed for decades and remains unindexed.
With rising inflation and the significant increase in asset values and property prices, more superannuation funds are likely to exceed regulatory thresholds in the future. This could result in a greater number of Auditor Contravention Reports being issued, increasing the compliance obligations across the sector.
Compliance is an integral part of the SMSF sector. However, as part of understanding their regulatory requirements, it’s vital Trustees also understand Auditor Contravention Reports.
For trustees who are actively working to maintain SMSF compliance, receiving an Auditor Contravention Report (ACR) should not trigger panic. Instead, it provides an opportunity to gain clarity on the issue and guidance on any necessary rectification steps.
However, it’s important to understand that while a single contravention may be rectifiable, repeated or unaddressed breaches can have serious consequences — including potential trustee disqualification, as outlined earlier.
Education is the key to compliance, which includes understanding ACRs. These reports are a vital regulatory tool that helps uphold the integrity of the SMSF sector and ensures that funds continue to meet their compliance obligations effectively.
