“Some SMSF trustees may not be immediately attracted to the idea of proactively approaching the ATO regarding a fund’s compliance issues. However, there can be numerous advantages in making a timely voluntary disclosure to the ATO and it is worth noting that many contraventions are detected and reported via various means in any event.”

Butler added that trying to “fly under the radar” or hoping the problem will go away are generally not a prudent course and in many situations timely action can minimise being placed in a significantly riskier position if things are left to fester.

He continued that most contraventions are reported to the Tax Office by SMSF auditors via the auditor contravention reporting system, and in FY2021 there were 13,600 SMSFs with 40,000 contraventions reported.

“Where an SMSF auditor forms the opinion that a contravention of SISA or SISR may likely have occurred, may be occurring, or may occur, they are required under s 129 of SISA to report the contravention or potential contravention to the ATO via the ACR notification system.”

“It is compulsory for each SMSF, in addition to having the accounts and administration of the fund maintained each financial year, to have the financial statements, investments and operations of the fund audited by an independent auditor to determine whether the financial statements are correct and to check compliance with various provisions in the SISA, SISR and the Income Tax Assessment Act 1997.”

Additionally, Butler said, there was a range of other surveillance methods used by the Tax Office to collect information, including undertaking reviews or audits of SMSFs, especially where its systems or intelligence gathering mechanisms determine that a contravention has occurred.

“SMSF trustees must be mindful that, if there is any contravention including any potential contravention yet to occur, there is a significant risk that it will be notified to the ATO or detected by the ATO in due course, so early engagement and voluntary disclosure is generally a wise move.”

“The ATO’s voluntary disclosure process is designed to encourage funds to proactively engage with the regulator to achieve better compliance, reduce the ATO’s use of resources and typically result in lower penalties and adverse consequences. Therefore by disclosing contraventions upfront, SMSF trustees should be in a better position.”

If an SMSF decides to make a voluntary disclosure, certain steps should be taken in preparing a submission to the ATO.

“The submission should include all relevant material facts and supporting documents, as well as the details of any rectification plan that has been put in place or contemplated. It is best to have an experienced SMSF adviser or SMSF lawyer assisting in preparing the submission,” Butler said.

“If an adviser prepares a submission for a client, the submission should also be reviewed by an experienced and independent SMSF lawyer. In certain cases, a proposed enforceable undertaking may also be appropriate. This is where the SMSF trustee still has to rectify the breach and proposes the steps the trustee will take to do so.”

The drafting of an enforceable undertaking should be prepared by a lawyer since it would involve legal work.

“A submission should be carefully worded and prepared and ideally lodged before any ATO audit or compliance action. If the SMSF auditor is proposing to lodge an ACR, then timely action should be taken to lodge a voluntary disclosure before the auditor lodging any ACR,” Butler said.

The submission must be checked to ensure it is true, correct and supported by appropriate evidence as any false or misleading statement can be subject to serious consequences.

“The ATO may, and in many cases will, ask further questions or request further supporting information or evidence to verify some or all of the contents in the submission,” Butler said.

“That is why it is important that a lawyer is involved in the process to prepare, or at least review and check the draft submission and to assist as and when needed.”

Although an experienced SMSF adviser should be in a position to provide some guidance on the risks and penalties that might be involved as a result of going through a disclosure process, there were no guarantees of the outcome as the Tax Office would make the final determination.

“In any event, SMSF trustees and members should be ready for a range of penalties and compliance actions being taken by the ATO including administrative penalties, rectification and education directions, non-compliance, being rendered a disqualified person and other sanctions,” Butler said.

“The administrative penalties alone can be significant. Currently, several administrative penalties are around $20,000 per breach and in FY2021 an average of three contraventions per SMSF were reported to the ATO via the ACR system. The administrative penalties for contravention of SISA can range between five and 60 penalty units, with each penalty unit attracting a $330 fine from 7 November 2024. As such, administrative penalties can approach a maximum of $20,000.”

Butler added that if there were individual trustees, the penalty would be multiplied by the number of trustees.

“The imposition of administrative penalties on each individual trustee, in essence, means that every SMSF with individual trustees should be moved to a corporate trustee as soon as practicable because an administrative penalty can easily be imposed even if you have acted honestly and in error.”

“Even where a voluntary disclosure is made, an SMSF still faces the risk of being subject to a range of penalties and, in certain more extreme cases, rendered non-complying. Also, increasingly, the ATO is seeking to disqualify trustees/directors from forever being involved in an SMSF.”