9 minute read
Compliance problem solving
LIZ WESTOVER is superannuation, SMSF and retirement savings partner at Deloitte.
It is never a pleasant experience when an SMSF falls foul of the governing legislation. Liz Westover outlines some steps that will make these situations more manageable for advisers and their clients.
There aren’t many SMSF advisers in the country who have not had a client with some form of compliance issue or breach. Fortunately, many of these are minor and can be relatively easily resolved, but occasionally they are serious and need assistance or intervention to get back on track. These issues could be anything from late lodgement of annual returns through to in-house asset issues, residency matters, illegal early release of funds or simply not getting the timing right on year-end contributions.
The more serious breaches are reported to the ATO by auditors via an auditor contravention report (ACR). This type of action typically occurs in approximately 2 per cent of cases. Minor matters may never get reported and the ones in the middle might give rise to a qualification in the annual return or are raised by the auditor in their management letter to the trustee.
The main message is whatever the breach, minor or serious, don’t ignore it. It won’t get better and it won’t go away. Deal with it as soon as you can.
An escalation process in assessing a problem usually works well.
What’s the problem?
The first thing to do is clearly identify the problem. What is it? What led to it? Can it be easily resolved? An expense paid by the member and not reimbursed can be treated as a contribution or most auditors will allow it to be treated as a sundry creditor at year end if quickly repaid.
An underpayment of minimum pension amounts is harder to resolve, but not impossible. How big the underpayment is needs to be determined. The ATO allows for an underpayment of up to 1/12th of the minimum amount if it is picked up quickly in the new financial year. Whether there were any extenuating circumstances also needs acknowledging. Perhaps the bank incorrectly dishonoured a cheque or a member suff ered a medical episode at the end of the year when they normally make such payments. Oft en these can give rise to the ATO exercising some discretion to allow the pension to remain on foot and eligible for tax exemptions.
Generally, you have to ask for discretion and you have to be on the front foot in pleading your case. A less favourable outcome is likely if the matter has already been identified and/or reported to the ATO. This is particularly so in cases of excess contributions. The regulator is far less likely to accept a mistake was made if trustees and their advisers are responding to an excess contributions determination rather than self-reporting it to the ATO in the first instance.
Legislation
When a compliance breach arises it is most important to read the relevant legislation. This is actually the source of truth and contains oft en forgotten exclusions or exemptions to otherwise commonly known rules for SMSFs. This might be the case when determining whether an asset is an in-house asset or determining if an asset is able to be acquired from related parties. Exemptions and carve-outs exist and going back through the legislation and regulations with a particular scenario or circumstance in mind can be the fastest and easiest way to work through a problem.
Research
The next step is to start researching what others have done. The ATO and professional association websites are a great source of information. They oft en contain great tips and insights into real-life cases and scenarios and importantly any preliminary views or precedence on ATO thinking on similar situations.
Private binding rulings
Existing ATO private binding rulings (PBR) are an underutilised resource. Although they can only be relied on by the person who applied for the PBR, they give great insights into the ATO’s thinking or approach on matters. Further, if the need arises to apply for a PBR, they can be of great assistance in using the appropriate structure and wording as well. Sanitised versions of PBRs can be found in the legal database on the ATO website.
Rulings from the ATO
ATO rulings are a gold mine resource as well. Not only do they articulate the ATO’s position on a particular matter, they almost always have an abundance of examples you can compare with your own situation. They will frequently provide the answer to an issue or help in clarifying your own thoughts on the workings of the law. Rulings are also available on the ATO legal database on their website.
Industry contacts
Talk to colleagues, draw upon professional associations or ask the ATO – use the experience of your contacts in the industry. Most are very generous with their time, experienced, can be a great sounding board for scenarios and can direct you in the right direction for rulings or other information. Industry events Attend industry events and discussion groups and use the opportunity to ask questions of the speakers or attendees during or aft er the sessions. Even if they can’t give you the answer immediately, they can oft en guide you on whether your approach to a problem is on track or point you to other sources of information.
Get an expert opinion
Ultimately, if you can’t find the answer yourself, it may be time to consult with an experienced SMSF adviser for a discreet piece of advice. You can’t know everything all the time. Sometimes it’s worth focusing on your day-to-day work and engaging an SMSF expert for a piece of advice for you or your client. This can be particularly useful if you need an independent assessment of the law and how it applies in a given set of circumstances – especially if it’s a longstanding client and you or your staff may have been involved in advising the client for a period of time.
Related-party transactions and investments can be complicated, so it can be worth getting expert advice in dealing with these items too, not only to solve a problem, but help prevent one occurring in the first place. Too many trustees have become derailed by pre-1999 unit trusts, 13.22C trust rules, unpaid dividends, loans and the like because they didn’t get the right help at the right time. The right time is frequently at the front end of a transaction. Setting the foundation for the future can avoid costly mistakes from occurring later on.
Speak to your auditor
Auditors can be a great source of information on compliance matters, but, more importantly, they can give you insights into how they are likely to treat a breach during an audit. This can guide you in how and when to rectify an issue. A good auditor will help you work through a rectification plan and enable an ACR to be lodged stating rectification has already taken place. The ATO is generally far more interested in unrectified breaches than those that have already been resolved.
It is likely an experienced auditor will also be able to talk to similar breaches they have seen and how they were resolved and/or treated by the ATO.
Apply for a PBR
PBRs are the perfect way to gain certainty around how the ATO will treat a breach or situation as once received it is binding on the tax commissioner. However, be careful what you ask for as the answer may not be the one you were looking for and, once given, it is much harder to take a different position knowing how the ATO will respond given the exact circumstances. Sometimes, however, an issue is more one of interpretation rather than a breach and seeking ATO confirmation that a matter will be treated a certain way gives comfort to clients. Getting a PBR on the ATO view of whether a family member is a dependant for the purposes of receiving a super death benefit and the ensuing tax implications provides certainty in what can otherwise be a challenging time for clients.
Engage with the ATO
Some problems can’t be easily or readily solved. There are a number of areas in which the ATO has little flexibility and some involve breaches that are so egregious, the best course of action is to engage early with the regulator, voluntarily disclose the breach to it and agree on how best to move forward.
A voluntary disclosure to the ATO is like a safety switch that can mitigate or prevent what otherwise might occur. In almost all cases, a voluntary disclosure will result in a better outcome than if a breach is found by the ATO or it becomes aware because an ACR is lodged by the auditor. The best approach is to go to them, declare your hand and suggest a solution. This way, you get the ATO on board to give you time to resolve matters, but importantly to agree on what that resolution is, rather than trying to guess what will be acceptable.
A voluntary disclosure will not provide absolution nor should it be asked for – the best tactic will be to take a reasonable approach to rectification. Make it easy for the ATO to accept what you propose rather than risk them outright rejecting an unreasonable suggestion and coming up with their own expectations for resolution. For example, if a loan is the problem, put forward a reasonable interest rate and time within which amounts will be repaid.
If multiple years of outstanding returns are to be lodged, commit to having them brought up to date within a reasonable period of time. In some cases this may mean volunteering to wind up the fund and for the trustees to agree never to act as an SMSF trustee again. Ultimately, you want to demonstrate to the ATO the trustees are committed to rectifying any breaches and getting the fund or their affairs back in order.
What to expect from the ATO
In the early years of regulation, the ATO had limited options available to it when contraventions occurred. In practice, the regulator could either do nothing or make a fund non-complying, which was largely seen as unreasonable or inappropriate for less serious breaches. The Stronger Super reforms introduced a range of other options to the regulator, allowing it to better deal with different contraventions and breaches. These options were broadly supported by the industry as a useful tool to drive and encourage good behaviours by trustees.
The ATO’s arsenal of penalties currently consists of the following:
• rectification orders,
• education orders,
• administrative penalties,
• disqualification of trustees, and
• making a fund non-complying.
To date, the ATO has taken a pragmatic, and sometimes lenient, approach to imposing them. Unfortunately, even with these new penalties, the behaviour of trustees around non-compliance issues hasn’t shifted and advisers and their clients should expect the ATO to impose these penalties more frequently and to a greater extent. Where full remission of penalties may have been possible in the past, this is not likely to continue. The regulator is expected to release its compliance guidelines on the imposition of penalties imminently.
Compliance with relevant laws can be challenging, but is required when acting as an SMSF trustee. Knowing how to navigate issues and resolve them in the most appropriate way is essential.
