Voluntary disclosure program

The ATO’s SMSF early engagement and voluntary disclosure service allows SMSF trustees to proactively disclose contraventions to the ATO. By disclosing contraventions up front, the trustees should be in a much better position regarding any sanctions that might otherwise be applied. Our article here outlines the possible compliance actions the ATO can impose on SMSF trustees.

Typically, a voluntary disclosure will involve providing all relevant facts, supporting documentation and a rectification proposal or proposed enforceable undertaking to the ATO. This allows the SMSF trustees to set the rectification and propose the steps they will take to fix the compliance issues.

Current ATO approach

The ATO is currently seeking to resolve issues while minimising the financial sanctions and penalties that might otherwise be applied during these difficult times. This more flexible approach has been brought about as a result of the difficult environment we all face with the COVID-19 pandemic.

Furthermore, the ATO has recently reviewed the application of its administrative penalties under s 166 of the Superannuation Industry (Supervision) Act 1993 (Cth) which highlighted that its staff have been too lenient in remitting these penalties. The ATO wishes to rebalance its handling of imposing these penalties with a firmer approach.

Broadly, the ATO sees the ability to having an SMSF as a privilege and SMSF trustees and members should act in accordance with the super rules. The experience to date has shown that its approach to date has not had the desired result of encouraging better behaviour. The ATO plans to issue a Practice Statement Law Administration (PS LA) to guide its officers on its “rebalanced” policy regarding the application of administrative penalties for SMSF trustees in the near future.

Thus, SMSFs with outstanding compliance issues should seriously consider making a voluntary disclosure while the ATO has this more flexible approach available. There is no date on when this flexible ATO approach will end, but we suspect that this will depend on when the PS LA issues and how many contraventions arise as a result of COVID-19.

We anticipate that there will be a considerable number of SMSFs with contraventions occurring in the current environment, as people, family and businesses seek to focus on survival, which includes paying for immediate necessities, rather than complying with super rules. These financial pressures do not, however, provide any excuse or defence for contravening the super rules, and advisers in particular should be proactive in alerting clients that illegal early access to super benefits will still be treated seriously.

Sanctions that may apply to illegal early access could, for instance, include hefty tax and administrative penalties, non-compliance, disqualified status and a range of other penalties. There have been many legal cases that broadly confirm that SMSFs trustees and members must comply with the super rules and “the SMSF is not the ‘banker of last resort’”.

Moreover, the ATO’s more flexible approach is only applicable to SMSF trustees that make a voluntary disclosure before an ATO review or audit is commenced. A different treatment applies if any contraventions arise from any ATO review or audit activity.

Most contraventions are reported to the ATO by SMSF auditors engaged and paid by each SMSF via the auditor contravention reporting system. Thus, if there is any contravention, it is likely to be notified to the ATO in due course and early engagement and voluntary disclosure is generally the best way forward.

Shaun Backhaus, lawyer, and Daniel Butler, director, DBA Lawyers