ATO, Compliance

ATO gives trustees six months to comply

ATO SMSF rectification

SMSF trustees ordered by the ATO to rectify a contravention will have six months to do so before being hit with a significant administrative penalty.

The ATO has released the guidelines under which its staff can issue rectification directions to SMSF trustees, who will have six months to comply with the regulator’s instructions before being hit with a significant administrative penalty.

The guidelines, Practice Statement Law Administration (PSLA) 2023/1, were released late last week and stated that while the ATO could impose an administrative penalty or provide an education direction, ATO staff could also issue a rectification direction under section 159 of the Superannuation Industry (Supervision) Act.

The ATO stated the issuing of a rectification direction was dependent on whether proactive steps had been taken to rectify a contravention before the regulator commenced action, but once a direction had been given, trustees were time bound in their response.

“Generally, a period of up to six months will be sufficient to rectify most contraventions, with up to 12 months in extreme cases,” the PSLA stated.

“An administrative penalty is not imposed for failing to comply with a rectification direction.

“However, if the person fails to comply with a rectification direction by the specified period of time, the person commits an offence of strict liability which carries a maximum of 10 penalty units [currently $2750].”

The specific criteria for issuing a rectification direction would include any financial detriment the SMSF might suffer as a result of the trustee complying with the direction and the nature and seriousness of their contravention.

“A fund will often experience some level of financial detriment as a result of complying with a rectification direction. This is because potential exposure to financial costs or losses is a natural consequence of unwinding a commercial arrangement,” the PSLA stated.

“When weighing up any expected financial detriment, you should focus on the significance and degree of that detriment, the proportion of the fund’s assets involved in the contravention and the reasonable estimates or opinions the fund may have provided about the expected financial costs or losses in complying with a direction.”

The guidance also directed ATO staff to consider what type of contravention took place and the compliance history and behaviour of the trustee prior to that event.

A rectification direction will generally be appropriate where the person’s behaviour and circumstances which gave rise to the contravention involved mistakes due to insufficient trustee knowledge or failing to take sufficient care in their duties,” it said.

“However, it may become less appropriate as the person’s behaviour and circumstances approaches or involves recklessness, or intentional disregard of trustee obligations.

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