Understanding the reportable breach process in ATO’s new investment strategy changes

The ATO’s letters have stated that when you don’t comply with the investment strategy requirements, the SMSF’s auditor may need to notify the ATO about this by lodging an auditor contravention report (ACR). Further, when it identifies that you have breached the investment strategy requirements, then you should fix the breach. 

ASF Audits head of education Shelley Banton said that from the auditor perspective, before it gets to the point of making a reportable breach, the auditor is going to want to make sure they have their facts straight.

“So, they’re going to review the investment strategy and they’ll issue a query that should list the deficiencies,” she said.

“Now you’re not going to be told how to fix it because then the auditor is going to be at risk of auditing their own work, and that’s an independence issue, but they will make sure that any amendment or update provided by the trustee is going to address those issues.”

Ms Banton said what becomes critical here is deciding whether it’s reportable or not, and that comes down to those seven reporting criteria set down by the ATO.

“Unfortunately, Reg 4.09 doesn’t have a monetary value applied to it and that’s similar to section 62 of SIS in the sole-purpose test because it just simply applies to all assets of the fund,” Ms Banton explained at the national conference.

“So, what tests do apply? Well, for a new fund, test number two will apply and that identifies all contraventions in the fund that are less than 15 months old and where the value of that single contravention $2,000.

“In that case, the breach would be mandatorily reported in the first year where the assets exceeded $2,000 and there was a breach of Reg 4.09 and, obviously, not when there was just a rollover into the fund and nothing had been done. 

“If the fund was an established fund, the reporting criteria would be met if the auditor identified that a breach was rectified in the previous year and was then repeated in the current year or there was a bridge from the previous year remaining unrectified at the time of the audit.”

It is also important to be aware that last October the ATO released PSLA 2020-3, which detailed their approach to applying those administrative penalties when they receive ACRs, according to Ms Banton.

She noted that, in reality, those SIS regulations haven’t changed, but in order for the ATO to apply a penalty before 1 July 2014, they had to go to the Federal Court and argue their case.

“That’s probably one of the reasons why there’s less riskier breaches that would have flown under the ATO radar,” she said.

“Since then, we’ve seen the ATO go down an education[al] path in trying to improve ACR statistics, but they’ve stayed at around 2.5 per cent, so the ATO has moved from that approach and we will be looking at them applying penalties through the means outlined in PSLA 2020/3.”

Ms Banton said it’ll be interesting to see whether there’s a change in the composition of the ACR stats, because Reg 4.09 wasn’t actually even listed in those stats in the future as a result of the ATO trustee letter campaign.

“Let’s also remember that the penalty for a breach of 4.09 for all audits done now regardless of what year’s been audited is going to incur those 20 penalty units or $440 per trustee,” she said.

“It’s also a breach of the operating standards, so you may, if convicted, also incur a penalty of up to a hundred penalty units per trustee, which is nothing to be sneezed at.”