Last week, the ATO released its updated guidelines of Practice Statement Law Administration (PSLA) 2023/1, which indicated its staff could issue rectification directions to SMSF trustees.
If those directions are not met within six months, the trustee could face administrative penalty.
The PSLA noted that other compliance options could be used alongside a rectification order but will depend on the circumstances. These include an education direction or charging administrative penalties.
A rectification directive not be given where it would disqualify an individual and prevent them from being a trustee of an SMSF or taking action to wind up a fund. In addition, a rectification order should not be given if the ATO has accepted an enforceable undertaking that covers the contravention.
The PSLA also stated that a rectification direction requires a trustee to take specific action within a time period to, for example, pay back a loan, dispose of an asset or lodge a return and show evidence that action has been taken.
“Generally, a period of up to six months will be sufficient to rectify most contraventions, with up to 12 months in extreme cases,” the PSLA stated.
“An administrative penalty is not imposed for failing to comply with a rectification direction.
“However, if the person fails to comply with a rectification direction by the specified period of time, the person commits an offence of strict liability which carries a maximum of 10 penalty units [currently $2,750].”
Before issuing a rectification order, the ATO must first consider any financial detriment the SMSF might suffer as a result of the person complying with the direction and the nature and seriousness of their contravention.
“A fund will often experience some level of financial detriment as a result of complying with a rectification direction. This is because potential exposure to financial costs or losses is a natural consequence of unwinding a commercial arrangement,” the PSLA stated.
“When weighing up any expected financial detriment, you should focus on the significance and degree of that detriment, the proportion of the fund’s assets involved in the contravention and the reasonable estimates or opinions the fund may have provided about the expected financial costs or losses in complying with a direction.”
ATO staff also were advised to consider the type of contravention, the compliance history and the behaviour of the trustee prior to that event before issuing a rectification direction.
“A rectification direction will generally be appropriate where the person’s behaviour and circumstances which gave rise to the contravention involved mistakes due to insufficient trustee knowledge or failing to take sufficient care in their duties,” it said.
“However, it may become less appropriate as the person’s behaviour and circumstances approaches or involves recklessness, or intentional disregard of trustee obligations.”
