ATO, Compliance

Grant discretion for early-release rectification

early release discretion

SMSFs should be given discretion by the ATO in the case of accidental early release if that mistake has been rectified immediately.

SMSFs that have made an unintentional error leading to early release of funds should have discretion extended to them by the ATO provided the fund has attempted to immediately rectify the situation, according to two accounting bodies.

In a submission addressing draft Law Administration Practice Statement 2021/D3 (PS LA 2021/D3) and draft Tax Determination 2021/D6, which are reviewing the ATO commissioner’s use of discretion, CPA Australia and Chartered Accountants Australia and New Zealand said discretion should be applied where the early release was accidental and a subsequent effort was made to correct the mistake.

Using SMSFs as an example, the submission noted due to genuine misunderstandings about the complex superannuation laws and related administrative guidance, trustees could make the mistake of paying a benefit before a relevant condition of release specified in the Superannuation Industry (Supervision) (SIS) Regulations 1993 had been met.

“Mistakes may arise because the SMSF trustees have misunderstood information published on the ATO website and the error is uncovered by a professional adviser only during the preparation of the annual accounts when the audit is conducted and/or during the tax return preparation process,” it said.

The two bodies agreed with the approach outlined in PS LA 2021/D3 that no discretion should be applied when early access was due to financial hardship, the disqualification of a trustee, undesirable tax consequences and illegal access schemes.

They did not, however, agree with the ATO’s proposed treatment of rectified transactions, which stated an “attempt to rectify a transaction by paying an amount equal to the superannuation benefit to the superannuation fund, immediately or shortly after receiving the benefit, is generally a factor that would be given little or no weight when considering to exercise the discretion”.

“It is our view that this approach appears unnecessarily harsh in some circumstances,” the two bodies said.

“Our view is that an attempt to immediately rectify an inadvertent error is valuable evidence that discretion may be deserved.”

To that end, the submission suggested the regulator offer more reasonable concessions, and its draft PS LA 2021/D3 highlights the importance of SMSF trustees seeking professional advice or support from the ATO.

The two accounting bodies suggested appendix 1 of the practice statement include the statement: “It is expected that all trustees of an SMSF will be aware of all the relevant requirements of the SISA (SIS Act) and the SISR (SIS Regulations) pertaining to the payment of benefits and seek ATO or professional advice to clarify their understanding of the relevant laws.”

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