New ATO approach to administering penalties for breaches of SIS provisions

The Australian Taxation Office has recently issued Practice Statement Law Administration 2020/3 (PSLA 2020/3) which provides for the administration of penalties imposed under s166(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SISA”) for contraventions involving SMSFs.

PSLAs are internal documents which provide direction to ATO staff on approaches to take when performing duties on the laws they administer. They are not law or public rulings and cannot be relied upon to provide interpretative advice on particular legislation, but do provide helpful insight as to the approach case officers will take.

Section 166(1) of SISA

Section 166(1) sets out a list of the SISA provisions where liability for an administrative penalty applies if that provision is breached. These provisions include many well-known SMSF compliance sections such as the in-house asset rule, the prohibition on borrowings and providing a loan or financial assistance to a member or relative.

The purpose of the section is to encourage voluntary compliance by ensuring that there are consequences where trustees or directors of trustee companies have behaved poorly. Section 166 also aims to shift trustee behaviours for better compliance, particularly where an educational approach taken by the ATO has not been effective.

Penalty amounts for breaches of SISA provisions, measured in penalty units, are also specified in s166. The penalty applies to the trustee of the SMSF. If the trustees are individuals, separate penalties are imposed on each trustee for the same offence. If, however, the trustee is a company, a single penalty is applied which is shared between the directors. Importantly, a penalty must be paid from personal funds, not from the SMSF assets.

PSLA 2020/3

The purpose of PSLA 2020/3 is to provide guidance to ATO staff on a number of matters arising from a contravention of a provision listed in s166 of SISA, including penalty remission considerations. It includes a number of indicative examples of compliance treatment and the approach that can be taken by the ATO when considering a remission of penalties.

Remission of Penalties

The ATO has an unfettered discretion to remit all, part of or none of a penalty imposed. According to the practice statement “remission provides the administrative flexibility to ensure that the penalty imposed is appropriate for the observed behaviour”.

The ATO is directed to consider the individual circumstances of the case when making a remission decision and in particular, for each case:

  • The background and experience of the trustees and/or directors;
  • Historical compliance by the trustees or directors;
  • Attempts to voluntarily disclose prior to ATO intervention; and
  • Any circumstances that may have caused or contributed to the contravention, or affected the ability to rectify the contravention.

The practice statement also outlines a number of other factors to be considered, including:

  • Would the main objectives of s166 be compromised if the penalty was remitted;
  • Did the trustee act in a way that would reasonably be expected of another trustee in the same circumstances?
  • The seriousness of the contravention. For example, how were the fund’s assets affected?
  • Whether the penalty is unreasonable such that it would cause unintended or unjust results;
  • Were there multiple breaches of the same provision? An example of this may be where there have been multiple withdrawals of member funds without satisfying a condition of release; and
  • Has a particular event resulted in breaches of multiple provisions referred to in s166(1)? If one particular event results in breaches of multiple provisions, the ATO could potentially remit the penalty for the secondary contravention and then consider whether there should be a remission of any part of the penalty for the primary contravention.

Whilst good prior compliance or even attempts to rectify the breach may support a penalty being remitted, this may be outweighed by other factors that would warrant otherwise. It is also important that trustees or directors are aware of their role and responsibilities in acting in this role. The practice statement specifically notes the relevance of the trustee or directors being required to declare that they understand their duties and obligations at the time of setting up the SMSF when considering penalty remission. The trustee declaration form is required to be kept for the life of the SMSF and for a period after wind-up of the SMSF, and made available to the ATO if requested.

A trustee or director who is dissatisfied with a remission decision has rights to appeal in certain circumstances, which may include applying to the Administrative Appeals Tribunal or Federal Court of Australia.

Tips and Awareness

Whilst there should never be an intention to establish and operate a SMSF with a view to contravening any of the administrative penalty provisions, PSLA 2020/3 is now a valuable published tool in understanding the practical approach taken by the ATO around the issue of penalty remission.

Steps or actions that trustees or directors could take which could result in penalties being remitted, all or in part are:

  • Immediately taking action to rectify the breach as soon as they become aware of the contravention;
  • Initiating and putting in place measures to ensure that a breach does not happen again;
  • Promptly engaging with the ATO by making voluntary disclosure. This is likely to be seen as favourable by the ATO, although all of the circumstances of the contravention will be considered. In some cases, the ATO may require an enforceable undertaking to be provided by the trustees or directors demonstrating how a contravention is intended to be rectified;
  • If a contravention is identified, noting down the circumstances that may have contributed to the contravention or inhibited the rectification of the breach. In example 11 of the PSLA which involved a borrowing, the case officer determined that there should be further remission for one of the trustees because he was in hospital and temporarily incapacitated at the time of the contravention and the other trustee had acted on her own and claimed full responsibility; or
  • Providing an undertaking to the ATO to further educate themselves on what a SMSF can and cannot do such as completing a SMSF education course.

How we can help

An understanding of the compliance requirements is paramount in operating a SMSF. There are onerous responsibilities imposed on trustees or directors and contraventions of any provision outlined in s166(1) of SISA can result in one or more administrative penalties applying. PSLA 2020/3 now gives an understanding of the approach by the ATO to administering penalties and the factors that will be considered in determining remission of penalties. For more information or guidance regarding any of the above, please do not hesitate to contact us.