Spurred on by Kenneth Hayne's royal commission, the Australian Taxation Office has cracked down on self-managed super fund trustees, particularly the estimated 33,000 “late lodgers."

Speaking to the SMSF Association’s national conference in February, ATO assistant commissioner Dana Fleming said the tax regulator would ensure there were “consequences” for trustees after a three-year review found some three-quarters of identified breaches effectively went unpunished.

“Trustees should be aware that breaches of the law will attract a penalty,” Fleming, assistant commissioner – SMSF segment, was quoted saying by Professional Planner.

According to Fleming, 75 per cent of administrative penalties were fully remitted, meaning there were “no consequences” for wrongdoing.

Subsequent compliance by trustees required to take remedial action had also been below par, suggesting that the ATO’s enforcement action had been “ineffective”.

Fleming said the most common contraventions were loans (21 per cent), in-house assets (18.5 per cent) and separation of assets (around 13 per cent).

In fiscal 2019, the ATO conducted less than 500 enforcement actions, including enforceable undertakings and disqualifications, despite identifying more than 27,700 regulatory contraventions from 10,330 SMSFs. Around half of the funds self-rectified.

Focus areas

Current compliance “risk focus” areas include:

  • regulatory contraventions
  • illegal early release and its promoters
  • non-lodgement
  • the top 100 SMSFs and tax planning issues
  • the top 100 SMSF auditors
  • “high risk” auditors
  • misuse of SMSF auditor numbers.

Fleming says the ATO will also seek to improve its own “regulatory effectiveness”by improving consistency in case outcomes and post-enforcement action processes.

The tax office is also working to make its enforcement actions and outcomes more effective and transparent – part of the reason for Fleming's appearance at the recent SMSFA conference..

She also pointed to actions such as updating “Practice Notes” and “Law Administrative Practice Statements” and the creation of a strategic compliance panel for more complex cases, among other changes.

Regulatory effectiveness will be enhanced through “greater utilisation of directions to educate poor post-enforcement action compliance." As part of this, trustees have been warned that breaches would be more likely to attract penalties.

Transparency will also be addressed by the ATO through an annual “Enforcement Report” of compliance actions and its approach to using SISA (Superannuation Industry (Supervision) Act) enforcement powers, among other measures.

The ATO’s tougher stance is highlighted by the increasing amount of administrative penalties, with the net amount rising from $1.7 million in fiscal 2018 to $3.1 million in fiscal 2019.

This year’s figure is likely to be much higher, with some $3.3 million already charged year to date.

In February 2020, the ATO began auto-subscribing SMSF trustees to its SMSF news service, while it also published its investment strategy guidance.

In March, the tax regulator plans to publish a note on its new enforcement position. Education and rectification directions will be released in June, and its fiscal 2020 enforcement report presented in August.

'Awkward phone calls'

Commenting on the latest changes, SMSF specialist adviser Liam Shorte said funds with a history of late lodgement of returns could expect "more warning letters and possibly some awkward phone calls”.

“They will also be looking a lot more carefully at SMSF investment strategies…The days of an accountant supplying a template with every sector having a zero to 100 per cent allocation are gone,” said Shorte, director at Verante Financial Planning.

“Trustees will have to show they have addressed the need for diversification and liquidity or provided details on how they will manage the risks of illiquid assets”.

He added: “The ATO will also be more closely following up funds that were previously given an ‘Education Direction’ or had penalties waived as their records show that these funds were more likely to contravene the rules again. So expect more penalties and less being waived.

“SMSF professionals should support these measure as it is all about making the sector robust and sustainable. If we can get lodgements up to date this will also help with research statistics and data compilation and analysis of the SMSF sector”.

The ATO’s Fleming stressed the regulator’s role remained as “protecting the integrity of the sector through a balance of enforcement and support…Disqualifying a trustee or issuing a notice of non-compliance will only be considered after other enforcement actions”.

With more than 1.1 million members and nearly $750 billion in assets, the SMSF sector accounted for 26 per cent of all super assets as at 30 June 2019, highlighting the importance of the sector’s integrity and long-term sustainability.