In the recent decision of FYYB v FC of T 2021 ATC 10-592; [2021] AATA 3567, the Australian Administrative Tribunal (AAT) affirmed the Commissioner of Taxation’s (Commissioner) decision to impose a remitted administrative penalty of $7500 on an SMSF.
The SMSF had applied for a review of the Commissioner of Taxation’s decision of 17 August 2020.
In this case, the auditor of the fund submitted an auditor contravention report for the 2017 tax year, which identified that the SMSF had borrowed $220,000 in contravention of section 67(1) of the Superannuation Act.
The ACR recorded that the borrowing, and the contravention, had been recorded in a fiscal management report in 2015. It was said that the loan would be restructured correctly, in line with the correct form for limited recourse borrowing arrangements (LRBA).
A period of time was allowed for that to happen and to fix the problem; however, the problem was not fixed, and eventually, the report was lodged with the Commissioner in 2018.
The Commissioner then imposed penalties for three separate contraventions of s 67(1) for each of the 2015, 2016 and 2017 tax years. The total penalties imposed were $31,800. The penalty for the 2015 year was $10,200, and for the other years, respectively, was $10,800. This was because the value of a penalty unit increased from $170 to $180 in 2016.
On 11 July 2019, the Commissioner remitted the penalty in part. The penalty was remitted to $7,500, representing a little less than 25 per cent of the total penalty that had been imposed.
On 20 November 2019, the SMSF objected to the Commissioner’s decision. On 17 August 2020, the Commissioner then disallowed the objection, and in October 2020, the fund filed an application with the tribunal, asking the tribunal to review the Commissioner’s decision disallowing the objection.
Sladen Legal senior associate Phillippa Briglia said that in reaching their decision to affirm the Commissioner’s decision (and the penalty), the AAT had observed that the fund had a poor tax compliance history, and even at the time of the AAT hearing, the borrowing contravention had not been fully rectified.
“The fund has had about six years to rectify those contraventions. It had not done so after three years, and it appears not to have taken any steps to do so until very recently. It is also significant that in June 2019, an enforceable undertaking was entered into, which would have seen compliance completed by 1 November 2019,” the AAT said.
“This did not happen, it is said, because it was too ambitious due to the various exigencies of the accounting practice with which the fund was associated and which later acquired the fund, including staff turnover, the development of or the introduction of new software and so on. They might explain but do not excuse the contraventions.”
Ms Briglia noted the fund had also failed to comply with the terms of an enforceable undertaking it had entered into with the Commissioner. The fact that there were “no consequences” resulting from the contravention did not lessen the seriousness of the contravention.
Further, the SMSF failed to provide any evidence that the penalty was oppressive or unjust.
“This case illustrates the importance of rectifying breaches of the SIS Act, especially when seeking remission of penalties from the Commissioner,” Ms Briglia explained.
“It also shows that the courts will uphold penalties issued by the Commissioner on SMSF trustees for contraventions of the SIS Act, including contraventions of the borrowing provisions.”
It’s an important lesson for accountants & SMSF administrators. It is [u]not[/u] the auditor’s job to identify or solve compliance problems. If you as an accountant or administrator serve up a SMSF for audit with compliance issues that haven’t already been identified by you and rectification action put in place, then you should not be in the SMSF admin business.
Many accountants outsource SMSF work and then flick pass it straight to the client as their own, assuming the work is correct and compliant. Its most likely not! Cheap fees are a good indicator of a problem. Be clear on who is doing what, you might be surprised. If you don’t understand SMSF compliance, stay out of SMSF admin.
In defence, there are many SMSF trustees who just wont be told, or just cant be bothered with SMSF complexity or trustee responsibility. They are the first to blame the accountant, administrator or auditor when things go pear-shaped. As we know, the ATO & Courts don’t accept trustee’s pointing the finger of blame as an excuse. In that respect, this is a good decision. We all know the type of stubborn, even bullying SMSF trustee who thinks they are a law unto themselves and won’t heed warnings.
The best you can do is continue to document your compliance concerns and warnings over and over or indeed, move them on before they cause damage and unnecessary scrutiny for your practice.
An SMSF is an obligation, not a right.
It might have been cheaper for this SMSF to pay the $7500 penalty than to spend up big on lawyers fighting this.
Sounds like a bit of cheek to look for a remission of penalties when they still had not rectified the breach!