Navigating SMSF compliance risks and best approach when facing the ATO

“Unfortunately, the exposures of trustees to breaches and contraventions of the SIS legislation are progressively getting more and more common,” Dr Orow said.

“In part, they have to do with the fact that, often, people are more concerned with having a fund that makes money, but they don’t seem to spend much time considering the implications of non-compliance.

“Now the implications of non-compliance are very serious and they are certainly serious to their trustees, and given the important context of SMSFs where the trustees are the members, then the implications to the trustees are the same as to the members and disqualification of the trustees could be very far-reaching.”

Dr Orow said it was crucial when looking at the compliance test for SMSFs and its legal context for the process when an SMSF is made into a non-complying superannuation fund.

“To become a complying fund and to maintain that status, you need to pass two tests; the compliance test is contained in section 42A(5),” Dr Orow said.

“Basically, this means no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income, or if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income.”

Dr Orow said if there is a contravention of those regulatory provisions in relation to the entity, then the regulator has the discretion not to issue a notice of non-compliance, which in the SMSF context would be the ATO.

“They have a discretion where they consider the tax consequences, the seriousness of the contravention and all other circumstances,” he said.

In terms of what the ATO considers the seriousness and regularity of the contravention, Dr Orow said in some of the matters that he has been involved in, there were references made to contraventions that occurred nine years earlier.

“So, the ATO has a very long memory,” he said. “Some of the contraventions cumulatively project a negative picture.

“So, for example, you have instances where a fund has been filing two or three returns about two or three or four days late and you need to think why would you want to have a contravention on your record for filing a return so late. The better strategy is to communicate with the ATO and try to reach an arrangement extension or whatever it is so as to avoid being in that position.

“Further, when failing to provide the auditor with certain documents and you end up with a notice of contravention by the auditor, and again, that’s unnecessary; where you have the documents, you should just deal with it as and when it arises.”

Dr Orow said the other thing that is looked at by the ATO is how those contraventions have occurred and the steps taken to limit them. 

“One of the most common questions that the ATO asks is, OK, you say there has been a contravention. What have you done about it? But more significantly, what have you put in place to make sure that it does not arise again?” he said.

“What is it that you have done to address effectively future contraventions? All of those matters by the way will be taken into account and determine whether a trustee is disqualified, and they are also taken into account in determining whether a notice of non-compliance is issued.”

In regard to whether the contravention has been rectified, Dr Orow said this relates to better managing the compliance history.

“So, keep the compliance history as clean as possible. Again, I’ve had people who say, well, look, this non-compliance is relatively insignificant, I won’t worry about it, but it sits in the background as a matter that will, cumulatively, when added to others, will then present a major problem.

“If there are events leading up to the contravention like if there is a death, a disability, accident or things of that kind and the trustees couldn’t act in a timely manner, then of course, these are factors that will be taken into account.

“But the critical factor I noticed is communication with the ATO. One thing that is a very bad strategy is to ignore correspondence from the ATO.

“It’s always a good idea to communicate to write to them to explain to them your circumstances, to ask for an extension if you need it and so on.”

Dr Orow also noted that it is also crucial to consider whether the trustee obtained advice, as it will always be viewed favourably.

“Advice basically provides it shows that you take your obligation seriously and in circumstances where you rely or someone has relied on that advice, then of course, it shows that they have acted reasonably and it certainly negates any argument of recklessness, dishonesty or anything like that,” he said.

"In circumstances where they obtain professional advice, it is properly drafted written opinion, and they act and rely on that opinion and it turns out they failed to comply with SIS legislations, you may find both the commissioner and the court would be extremely forgiving as it were and the court may form the view the person has acted honestly.

In addition Dr Orow pointed to section 323 of SIS, where if the defendant establishes the contravention was due to reasonable reliance on information supplied by another person or the contravention was due to an act or fault of another, result of an accident, some other cause beyond the defendant’s control and the defendant took reasonable precautions and exercised due diligence. 

“Bear in mind if they took steps to get advice, it is very difficult for the regulator to say they have not acted properly in the circumstances, because what else could you expect someone in their position to do given the complexity of the legislation."

"One would expect given those circumstances that is pretty much what a reasonable person would have done and consequently their defences of reasonable mistake and reliance will come into play.”