Some SMSF trustees may, on first blush and without the benefit of obtaining expert advice, 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.

Thus, approaches based on trying to ‘fly under the radar’ or hoping the problem will go away are generally not a prudent course. Indeed, in many situations timely action can minimise being placed in a significantly riskier position if things are left to fester.

How will the ATO find out?

Most contraventions are reported to the ATO by SMSF auditors via the auditor contravention reporting (ACR) system. For example, in FY2020 there were 13,800 SMSFs with 40,000 contraventions reported (an average of nearly 3 contraventions per SMSF).

Where an SMSF auditor forms the opinion that it is likely that a contravention of SIS Act or SISR may have occurred, may be occurring, or may occur, they are required under s 129 of SIS Act 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 SIS Act, SISR and the Income Tax Assessment Act 1997 (Cth).

In addition, there a range of other surveillance methods used by the ATO to collect information including undertaking reviews or audits of SMSFs; especially where the ATO’s systems or intelligence gathering mechanism determine that a contravention has occurred.

Thus, 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.

Are there any advantages with voluntary disclosures?

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. The ATO state that it will:

Take your voluntary disclosure and your willingness to engage with us at an early stage and throughout the review process into account when:

• Determining the level of enforcement action that is required
• Making a decision about the remission of any administrative penalties that may be applicable [1]

How do I prepare an appropriate submission?

Those preparing to disclose a contravention of superannuation law to the ATO should ensure that the submission includes 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.

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 submission should be carefully worded and prepared and ideally lodged prior to 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 prior to the auditor lodging any ACR.

Moreover, the submission must be checked to ensure it is true and 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. Thus, we reiterate that having a lawyer involved to prepare, or at least review and check the draft submission and to assist as and when needed, is highly recommended.

What is the ATO’s process?

Further details on the ATO’s early engagement and voluntary disclosure process can be found on the ATO’s website: SMSF early engagement and voluntary disclosure service | Australian Taxation Office (ato.gov.au)

In theory, the voluntary disclosure process is relatively simple; use the prescribed form to describe the situation, contravention and the rectification plan. However, as noted above, the submission should be appropriately worded and supported and is best prepared by an experienced SMSF adviser or SMSF lawyer.

Note, the ATO’s webpage, among other things, states:

We expect you to:

• Engage with your SMSF professional to devise a proposed plan of action to rectify the contravention
• Provide the proposed plan for rectifying the contravention and relevant supporting documentation with your voluntary disclosure
• Provide information that demonstrates that measures have been put in place to mitigate the risk of similar contraventions occurring in the future
• Actively engage with us throughout the review process
• Bring any outstanding SMSF annual return lodgments immediately up to date
• Make any necessary amendments to SMSF annual returns and/or individual members’ income tax and pay any outstanding income tax liabilities that may arise.

What about a disclosure for tax purposes?

This article focuses on voluntary disclosures to the ATO for regulatory (i.e., SIS Act and SISR) purposes rather than tax-related disclosures.

However, DBA Lawyers has a number of senior lawyers with extensive tax experience who also assist on voluntary disclosures for tax purposes. Thus, if there are also tax issues including income tax, capital gains tax (CGT) or other Federal or state tax issues, we can also assist with these matters. We have, for instance, assisted on numerous non-arm’s length income (NALI) disclosures.

A voluntary disclosure for tax purposes can also prove beneficial and may result in a potential reduction of up to 80 per cent in certain tax liabilities. Again, the ATO seek to encourage voluntary compliance by taxpayers and a stricter approach is applied if the ATO uncover matters as a result of its ongoing audit and surveillance activities.

Are there any risks?

An experienced adviser should be in a position to provide some guidance on the risks and penalties that might be involved as result of going through a disclosure process, i.e., after assessing the particular background facts and circumstances of the matter. Given the nature of the process, there are no guarantees of the outcome as the ATO makes 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.

The administrative penalties alone can be significant as, currently, several administrative penalties are $13,200 per breach and as noted above in FY2020 an average of three contraventions per SMSF were reported to the ATO via the ACR system. If there are individual trustees, this penalty is multiplied by the number of trustees. Naturally, a corporate trustee can result in a substantial saving if appointed prior to the relevant breach occurring.

Thus, even where a voluntary disclosure is made, an SMSF still faces the risk of being rendered non-complying, the trustees being disqualified and significant penalties imposed. The total potential cost and severity of the range of penalties and sanctions that can be imposed means it is vital to obtain expert assistance and representation.

Our article here outlines in greater detail the possible compliance action and penalties the ATO can impose on SMSF trustees.

DBA Lawyers has assisted many SMSF trustees and advisers to determine the most appropriate strategy moving forward including undertaking a careful examination of all key facts, reasons and documents, and making the most appropriate voluntary disclosure to the ATO. We are also happy to manage the ‘front line’ communications with the ATO on these difficult matters.

One of the other advantages of engaging a law firm that focuses primarily on SMSFs in these types of matters is that we can assist in preparing any relevant documentation and, if necessary and as instructed, pursue any objection or review that may be needed should the SMSF trustees be dissatisfied with the ATO’s initial determination.

As a law firm, our advice is also subject to legal professional privilege; other advisers do not have the ability to communicate with the protection and any communications with them can therefore be accessed by the ATO.

Please contact one of our lawyers if you would like to discuss how we may be able to assist.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice should be obtained from a licenced financial adviser under the Corporations Act 2000 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

Bryce Figot, Special Counsel, is presenting a special webinar on property development and NALI which also covers the recent ATO Taxpayer Alert TA 2023/2. For more details or to register, visit https://register.gotowebinar.com/register/610544945094534742.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Daniel Butler, Director (This email address is being protected from spambots. You need JavaScript enabled to view it.), William Fettes, Senior Associate (This email address is being protected from spambots. You need JavaScript enabled to view it.) and Cassandra Hurley, Lawyer (This email address is being protected from spambots. You need JavaScript enabled to view it.), DBA Lawyers

[1] SMSF early engagement and voluntary disclosure service | Australian Taxation Office (ato.gov.au) as of on 8 June 2023