Compliance Penalties When they are imposed and how to reduce them!

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1 Compliance Penalties When they are imposed and how to reduce them! Belinda Aisbett, Director, Super Sphere Pty Ltd Nathan Burgess, Director, SMSF Income Tax & Regulatory Programs, Superannuation, ATO

2 Introduction The new penalty regime Non-complying funds ATO advice on how to retain SMSF complying status Everyday contraventions and the ATO s approach Remission powers and how to apply Changes to auditor reporting requirements

3 The new penalty regime In effect from 1 July 2014: - contraventions that occurred before this date and remained uncorrected on 1 July 2014 fall under the current penalty regime - if the ATO undertakes an audit and identifies a contravention, a penalty must be imposed - if the ATO is investigating an ACR (via phone call), a penalty may or may not be imposed - if the ATO begin a review as a result of an ACR and a contravention is confirmed, a penalty must be imposed - one penalty unit = $170.

4 The new penalty regime Units Total penalty Lending to members 60 $10,200 Borrowing contravention 60 $10,200 In-house asset contravention 60 $10,200 Change of trustee and directors 10 $1,700 Non-compliance with regulations 20 $3,400

5 Non-complying funds Ali Super Fund Established at the direction of and controlled by a registered tax agent. Ali family then rolled money into the fund and made contributions. Money in the fund was then lent to a company controlled by the tax agent. The company then on-lent the money to the daughter of Mr Ali, or businesses in which the Ali family had an interest.

6 Non-complying funds Ali Super Fund summary of contraventions: Section 52(2)(d) failure to separate assets Section 62 sole purpose test Part 8 in-house assets (using anti avoidance provisions S71(2)) Section 109 arm s-length requirements. ATO made the fund non-complying. Tax agent was referred to the Tax Practitioners Board for investigation and disciplinary action.

7 Non-complying funds Super Fund A * Made loans to a fund member and a related party totalling approximately $155,000. Some repayments were made over the period of the loan. $92,000 still owing at the time of ATO review. * Based on an actual case, name withheld

8 Non-complying funds Super Fund A Summary of contraventions: Section 52(2)(d) failure to separate assets Section 62 sole-purpose test Section 65 loans to members Part 8 in-house assets Section 109 arm s-length requirements. ATO made the fund non-complying. Loans were then corrected, and the complying status was reinstated on the proviso that all remaining fund assets were to be rolled to an APRA fund and the trustees were disqualified.

9 Non-complying funds Super Fund B * SMSF invested in a related-party unit trust. Unit trust invested in a commercial property that was leased to a related party. The tenant failed to pay rent over an extended period of time. As a result, distributions were not paid up to the super fund. * Based on an actual case, name withheld

10 Non-complying funds Super Fund B Summary of contraventions: Section 62 sole-purpose test Part 8 in-house assets Section 109 arm s-length requirements. ATO made the fund non-complying. Rent was then paid, plus interest and outstanding distributions paid up to the fund. The non-compliance notice was then revoked by the ATO on the proviso that fund assets were rolled to an APRA fund and the trustees were disqualified.

11 Non-compliance Super Fund C * SMSF invested in a commercial property that was leased to a related party. A formal lease agreement was in place at what appeared to be commercial terms and conditions. Trustee of the fund failed to enforce the lease terms. A large sum of money was owed in outstanding rent. The parties agreed to pay outstanding lease/rent from unit trust to company. The total outstanding plus Div 7A interest was $464, as at 25 February 2013 with interest continuing to accrue at the Div 7A rate until repaid which was scheduled for August The ATO accepted the revised lease amount of $45,000 per year. * Based on an actual case, name withheld

12 Non-compliance Super Fund C Summary of contraventions: Section 62 sole-purpose test Part 8 in-house assets Section 109 arm s-length requirements. ATO considered the reasons behind the non-payment of rent and did not make the fund non-complying. Voluntary disclosure (via contact by the auditor to discuss the issues; the ATO s preferred approach). This approach helped the trustee avoid the non-compliance penalty. An enforceable undertaking was entered into and it was agreed that the contraventions would be corrected within 6 months.

13 Non-compliance Super Fund D * SMSF invested in a post-1999 trust (so Div 13.3A). The trust failed the requirements of R13.22C as there was a mortgage registered on the property. Even though the mortgage was then removed, 13.22C had been triggered. Trustee maintained they were unaware of the mortgage. Trustee maintained they acted on the advice of a lender. * Based on an actual case, name withheld

14 Non-compliance Super Fund D Summary of contraventions: Part 8 in-house assets ATO accepted the position of the trustee (and there were letters from the lender confirming their position) and did not make the fund non-complying. Voluntary disclosure of issues by the trustee assisted in avoiding the non-compliance penalty. An enforceable undertaking was entered into to ensure the trustee would satisfy the in-house asset rules in future; and to rectify the current breach by disposing of the asset. In this situation the auditor lodged an ACR also bringing this issue to our attention.

15 ATO advice on how to retain complying status Not working with the ATO to resolve matters in a timely manner is the fastest way to have a non-compliance notice issued. Trustees who refuse to resolve the issue or who are simply difficult, are more likely to have their funds made non-complying. Some non-compliance matters are simply too serious to avoid a non-compliance notice: wilful intent extensive issues over an extended period of time.

16 ATO advice on how to retain complying status Even if a non-compliance noticed is not issued: penalties will be, because a non-compliance review involves an ATO audit if no enforceable undertaking is offered, ATO will issue a rectification directive earlier on in the review ATO does not have to consider any objections to the terms of a rectification directive.

17 Everyday contraventions and the ATO s approach What occurs when: everyday bank overdrafts are reported on an ACR lodged non-compliance with section 17A, which has been corrected banking errors that result in loans to members investment title errors. The ATO imposes the appropriate penalty based on the type of breach, seriousness and the trustee(s) conduct and the compliance history of the SMSF. Issuing a notice of noncompliance is not normally the first response.

18 Remission powers and how to apply If a penalty notice is issued, the full penalty must be issued by the ATO. ATO provide details on how to request remission when the penalty is issued. How to request the ATO remit: explain how the issue occurred detail if the issue was beyond their immediate control demonstrate that reasonable steps were taken to ensure SIS was complied with advise the ATO fraud was involved volunteer to dob in your accountant, planner or lawyer if their knowledge is questionable and contributed to the issues or are responsible for the fund s predicament.

19 Changes to auditor contravention reporting Under the new penalty regime there are NO changes to auditor obligations to report contraventions to the ATO in an ACR. The fact that penalties may be handed down has zero impact on the auditor s obligations to report matters to the ATO. Any auditor not advising reportable contraventions to the ATO in order to assist trustees avoid penalties on ATO scrutiny will fail not only the SIS imposed requirements under section 129 but their independence will be questioned.

20 Disclaimer Belinda Aisbett, Super Sphere Pty Ltd and Nathan Burgess, Australian Taxation Office, 2015 This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.