ATO Practice Statement Law Administration

PS LA 2006/19

SUBJECT:	Self managed superannuation funds - notice of non-compliance
PURPOSE:	To outline the factors the Commissioner will consider in deciding whether a notice of non-compliance should be given to a fund under subsection 40(1) of the Superannuation Industry (Supervision) Act 1993 where the trustee has contravened one or more of the regulatory provisions

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FOI status: may be released

BACKGROUND

1. For a self managed superannuation fund (SMSF) to qualify for concessional tax treatment for income tax purposes, it must be a complying superannuation fund under sections 42A and 45 of the Superannuation Industry (Supervision) Act 1993 (SISA).^[1]

2. The Commissioner is the Regulator of SMSFs and as such is responsible for determining whether or not an SMSF is a complying superannuation fund.

3. The Commissioner may give an SMSF a written notice stating that the fund is or is not a complying superannuation fund (referred to as a notice of compliance or non-compliance, as the case may be) for a year of income.

4. A newly established SMSF will normally be given a notice of compliance when its first Self managed superannuation fund annual return^[2] (which combines the income tax return and regulatory return, and member contributions information) is lodged, and the return indicates that it has complied with all relevant requirements under the SISA.

5. A notice is not required to be given to an SMSF for each and every year of income. A notice of compliance given in relation to a year of income will be effective for that year and all subsequent years until such time, if any, as a notice of non-compliance is given to the fund.

6. An SMSF that holds a notice of compliance that is still in effect is eligible for concessional tax treatment for income tax purposes in relation to a year of income.

7. Where an SMSF is holding a notice of compliance that is still in effect, but does not satisfy the conditions for a complying superannuation fund for a year of income, the Commissioner may give the fund a notice of non-compliance for that year of income.

8. For income tax purposes, a notice of non-compliance will be effective for the year for which it is given and all subsequent years until such time, if any, as a notice of compliance is given to the fund.

9. The decision to give an SMSF a notice of non-compliance must only be made by an authorised officer (an Executive Level 2 officer or above) under the Taxation Authorisations Guidelines. Where a tax officer requires a decision in relation to the non-compliance of a fund, the officer must make a recommendation in accordance with this practice statement and escalate the recommendation to an authorised officer.

STATEMENT

10. This practice statement outlines the factors that the Commissioner will consider in making the decision on whether to give an SMSF a notice of non-compliance for a year of income, where the trustee^[3] has contravened one or more of the regulatory provisions in the relevant year of income.

11. This practice statement only applies to an SMSF that is a resident regulated superannuation fund.

12. The Commissioner has a range of options available under the SISA to deal with a contravention by the trustee of an SMSF. The options include:

•

making the fund a non-complying superannuation fund by giving the fund a notice of non-compliance (subsection 40(1))

•

accepting an undertaking from the trustee to rectify the contravention^[4] (section 262A)

•

disqualifying individual trustees and prohibiting them from acting as a trustee of a superannuation fund or as a responsible officer of a corporate trustee of a superannuation fund^[5] (section 126A)

•

suspending or removing the trustee (section 133)

•

as part of an investigation, freezing the assets of the fund if there is a risk of the members' benefits being eroded (section 264), and

•

seeking civil and/or criminal penalties through the courts. (Part 21).

The Commissioner may use one or more of these options to deal with a contravention.

13. The most appropriate option(s) to deal with a contravention will depend on the circumstances of the case. The option(s) chosen must accord with the compliance model. The model helps in understanding the factors and attitudes that motivate a taxpayer to comply or not comply with the law. It also helps in choosing the most appropriate response depending on the taxpayer's behaviour and individual circumstances.

14. In making the decision on whether to give an SMSF a notice of non-compliance for a year of income, the Commissioner will consider the following factors:

•

the taxation consequences that would arise if the fund was to be treated as a non-complying superannuation fund^[6] (refer to paragraphs 28 to 31 of this practice statement)

•

the seriousness of the contravention(s) (refer to paragraphs 32 to 35 of this practice statement), and

•

all other relevant circumstances (refer to paragraphs 36 and 37 of this practice statement).

15. The decision will be made on a case by case basis, taking into account the individual circumstances of the case. The final decision will be the result of a process of weighing up the factors set out in paragraph 14 of this practice statement. No one factor by itself will be conclusive and the weight given to each factor will vary depending on the circumstances of the case.

16. To ensure that a fair and reasonable outcome is achieved in each case, the decision will be made in accordance with the statements and principles set out in the taxpayers' charter, compliance model, and the good decision-making model. In particular, the taxpayers' charter requires that taxpayers be treated fairly and reasonably, so a decision to give a fund a notice of non-compliance will need to be fair and reasonable in the circumstances. This is further underlined by the good decision-making model, which requires that the decision be legal, ethical, overt, sensible, timely and in accordance with the principles of natural justice.

17. Generally, a notice of non-compliance will not be given to an SMSF if the Commissioner has accepted an undertaking (including an informal arrangement)^[7] by the trustee to rectify a contravention and/or to wind-up the fund, provided the trustee is genuinely attempting to satisfy the terms of the undertaking.

18. Also, in most circumstances, a notice of non-compliance will not be given to an SMSF if the Commissioner is satisfied:

•

with the wind-up of the fund by the trustee prior to any ATO compliance action, and

•

any money in the SMSF has been rolled-over to another fund and is independently managed now and into the future.

It would not be appropriate to give the SMSF a notice of non-compliance in this situation because any money in that fund has effectively been placed in a position where it will no longer be at risk from further contraventions by the trustee.

However, if after the trustee has wound-up their SMSF, the Commissioner finds that actions of the trustee preceding the wind-up were such that the Commissioner considers it appropriate to give the SMSF a notice of non-compliance, he is not precluded from doing so on the basis that the SMSF has been wound-up. Nor is the Commissioner precluded from exercising any of the option(s) available to him as listed in paragraph 12 of this practice statement.

19. Where the Commissioner believes that there is a risk of non-compliant behaviour by the trustee in the future, action will be taken against the trustee in accordance with Law Administration Practice Statement PS LA 2006/17.

EXPLANATION

20. For the purposes of this practice statement, a fund is assumed to be a resident regulated superannuation fund.^[8]

21. An SMSF that is not a resident superannuation fund will not be a complying superannuation fund.

22. An SMSF is a complying superannuation fund if it satisfies the conditions set out in section 42A. In essence, an SMSF is a complying superannuation fund for a year of income if the fund was a resident regulated superannuation fund at all times during the year of income when it was in existence, and the trustee has not contravened any of the regulatory provisions during the year of income.^[9] For income tax purposes, the SMSF will be a complying superannuation fund if the Commissioner has issued a notice of compliance in the current or previous years of income and has not subsequently issued a notice of non-compliance.

23. Where the trustee has contravened one or more of the regulatory provisions during a year of income, the fund will still be a complying superannuation fund for that year of income if the Commissioner considers that a notice of compliance should nevertheless be given to the fund (if such a notice has not already been given).

24. For the purpose of determining whether an SMSF is a complying superannuation fund, a contravention of a regulatory provision under the SISA is to be ignored unless the contravention is:

•

an offence under the SISA provisions, or

•

a contravention of a civil penalty provision,^[10] or

•

a contravention of a regulatory provision listed in paragraph 38A(ab).^[11A]

Factors to consider in deciding whether to give a notice of non-compliance

25. Where the trustee of an SMSF has contravened one or more of the regulatory provisions during a year of income, paragraph 42A(5)(b) provides that the Commissioner must consider the following factors in deciding whether a notice of compliance should be given to the fund for the year of income:

•

the taxation consequences that would arise if the fund was to be treated as a non-complying superannuation fund^[11]

•

the seriousness of the contravention(s), and

•

all other relevant circumstances.

26. While paragraph 42A(5)(b) sets out the factors that must be considered in deciding whether to give an SMSF a notice of compliance for a year of income, they are equally relevant in deciding whether to give an SMSF a notice of non-compliance.

27. Paragraphs 28 to 37 of this practice statement discuss the factors set out in paragraph 42A(5)(b) and explain how the Commissioner will consider them.

Taxation consequences

28. The first factor the Commissioner is required to consider is the taxation consequences that would arise if an SMSF is to be treated as a non-complying superannuation fund.^[12]

29. When an SMSF is treated as a non-complying superannuation fund it will lose its concessional tax treatment which applies to the low tax component of a complying superannuation fund.^[13] Accordingly the taxable income of a non-complying fund is taxed at 45%.

30. If an SMSF is made a non-complying superannuation fund for a year of income and it was a complying superannuation fund for the previous year, the fund's assessable income for the income year will include the following amounts from previous years:

31. As the decision to change the status of an SMSF from complying to non-complying will have a significant financial impact on the fund, due consideration will be given to each and every case. The Commissioner will consider whether it would be reasonable for the fund to be treated as if it is a complying fund and still receive concessional tax treatment. This will depend on the particular circumstances of the case, the seriousness of the contravention, and the trustee's attitude to complying with the regulatory provisions.

Seriousness of the contravention

32. The second factor the Commissioner is required to consider is the seriousness of the contravention.^[15]

33. The seriousness of a contravention will always be a question of fact and degree, and each case will need to be considered in light of its particular circumstances. In line with the compliance model, the ATO response to a contravention must be appropriate and proportionate. A notice of non-compliance should only be given to a fund if it would be reasonable, given the seriousness of the contravention, for the fund to be treated as a non-complying fund.

34. The following is a list of items to consider in determining the seriousness of a contravention.

•

The behaviour of the trustee in relation to the contravention.^[16] A contravention resulting from recklessness or intentional disregard^[17] for a regulatory provision is likely to be considered more serious than a contravention resulting from an honest mistake.

•

The extent to which the contravention affects the fund's assets.^[18] The greater the proportion of the fund's assets affected by the contravention, the more serious the contravention is likely to be.

•

The extent to which the fund's assets are exposed to financial risk and whether there is any loss to the value of the fund. The greater the proportion of the fund's assets exposed to financial risk and the greater the loss suffered by the fund, the more serious the contravention is likely to be. However, a contravention may still be serious if a significant proportion of the fund's assets has been put at risk, even though the fund has not suffered any actual loss.^[19]

•

The number and duration of contraventions over a period of time.^[20] A single contravention on its own may not be considered serious, but a number of contraventions taken together may make the situation more serious. In addition, the longer a contravention continues without any attempt to rectify it, the more serious it is likely to be.

•

The nature of the contravention in the overall scheme of the legislation.^[21] For example, a contravention involving an artificial arrangement intended to undermine a regulatory provision is likely to be considered a serious contravention.

35. While any one of those items in paragraph 34 of this practice statement may prove decisive in particular cases, it will always be necessary to consider all of them together to determine the seriousness of a contravention.

All other relevant circumstances

36. In addition to the taxation consequences and the seriousness of the contravention, the Commissioner is required to consider all other relevant circumstances.^[22] The circumstances do not necessarily have to be special or unique, they only have to be relevant. Some of the circumstances that may be relevant in particular cases are listed in paragraph 37 of this practice statement. The list is not intended to be exhaustive, it is merely illustrative.

37. Relevant circumstances may include the following.

•

Whether the trustee has rectified the contravention, entered into an enforceable undertaking to rectify the contravention, or taken any action (where possible) to prevent the contravention occurring again. Actions or behaviours that indicate a willingness to comply with the law will be considered favourably.

•

The trustee's level of skill and knowledge. The higher the level of skill and knowledge of the trustee in managing a fund, the more likely it is that they are expected to understand the impact of their action or inaction. A trustee with a more comprehensive understanding is expected to meet a higher standard of behaviour in order to demonstrate that the fund should be given another opportunity to improve compliance before being made a non-complying fund.

•

The compliance history of the fund before and after the contravention. A fund with a good compliance record will be treated more favourably than a fund with a history of non-compliance.

•

The events which led to the contravention and whether these influenced the trustee's decision. Examples include serious illness or death of a trustee or close relative, and natural disasters.

Review rights

38. A person who is affected by the decision of the Commissioner to issue a notice of non-compliance may request the Commissioner to reconsider if the person is dissatisfied with the decision. The request must be in writing, setting out the reasons for the request, and must be made within 21 days after the person receives notice of the decision, or within such further period as the Commissioner allows. If the person is dissatisfied with the outcome of the request, the person may apply to the Administrative Appeals Tribunal for a review of the decision.^[23]

Examples

39. The following examples are provided as a guide only. It is emphasised that tax officers must decide each case on its own circumstances, applying the guidelines provided in this practice statement.^[24]

Example 1 - Self managed superannuation fund annual returns^[25] not lodged for several years

40. An SMSF, a resident regulated superannuation fund, was established in 2000. The trustee lodged Fund income tax and regulatory returns for the 2000-01 and 2001-02 years of income, but has not lodged returns for the 2002-03, 2003-04 and 2004-05 years of income. The ATO has requested the lodgment of the outstanding returns on several occasions under the ATO lodgment enforcement program. The trustee disregarded each and every ATO request without offering any reasons. The ATO has also notified the trustee of a liability to pay penalties in respect of the outstanding income tax returns.

41. Failure by the trustee of a fund to lodge a return for a year of income constitutes an offence.^[26] In this case, the trustee has failed to lodge returns for three years of income, so there are three contraventions. Each of the contraventions is serious because lodging returns is a fundamental requirement of the regulatory regime and the trustee is expected to know this requirement. The number of contraventions involved and the trustee's disregard of the ATO's requests add to the seriousness of the contraventions.

42. Under these circumstances, it would be reasonable for the Commissioner to give the fund a notice of non-compliance because of the seriousness of the contraventions, the trustee's attitude to compliance as indicated by the trustee's disregard of the ATO's requests, and the fact that there are no relevant circumstances to mitigate the trustee's failure to lodge the outstanding returns.

Example 2 - a loan made to a relative of a member

43. The trustee of an SMSF (a resident regulated superannuation fund) made a loan to a relative of one of the members of the fund. The loan represented 60% of the total market value of the fund's assets and was made to the relative with little prospect of recovery. After two years the loan is still outstanding. The fund previously made a number of smaller loans to other relatives of the members. The loans were only repaid after action by the ATO.

44. The loan to the relative was made in contravention of the SISA, as the trustee of a fund is prohibited from lending money of the fund to a member or a relative of a member of the fund.^[27] The contravention is serious because the loan represented a large proportion of the fund's assets and the trustee has previously been advised that loans to relatives are not permitted. In addition, failure by the trustee to pay regard to the ATO's previous action is a clear indication that the trustee is not willing to operate within the regulatory regime. Under these circumstances, it would be reasonable for the Commissioner to give the fund a notice of non-compliance because of the seriousness of the contravention, the fund's history of non-compliance and the fact that the trustee is not willing to comply with the law.

Example 3 - a trustee has wound-up their SMSF

45. The trustee wound-up their SMSF in the 2007-08 income year and rolled-over money into an independently managed fund. The ATO conducts an audit of the fund for the 2005-06 income year and finds there were a number of contraventions over time. Some of these on an individual basis are not considered serious, however when aggregated, the Commissioner considers the contraventions to be so serious as to give the fund a notice of non-compliance. The fund's income tax assessment for the 2005-06 income year will be amended accordingly.

Amendment history

Date of Issue: 30 November 2006

Date of Effect: 30 November 2006

File 06/3107

Related Rulings/Determinations:
MT 2008/1

Related Practice Statements:
PS LA 2006/2
PS LA 2006/17
PS LA 2006/18

Subject References:
complying superannuation fund
notice of compliance
notice of non-compliance
self managed superannuation fund

Legislative References:
ITAA 1936 Pt IX
ITAA 1936 288A
ITAA 1997
ITAA 1997 295-325
ITAA 1997 Part 3-30
ITRA 1986 26
SISA 10
SISA 35D(4)
SISA 38A
SISA 38A(ab)
SISA 39
SISA 40(1)
SISA 42A
SISA 42A(5)(b)
SISA 42A(5)(b)(i)
SISA 42A(5)(b)(ii)
SISA 42A(5)(b)(iii)
SISA 45
SISA 65(1)
SISA 126A
SISA 133
SISA Part 21
SISA 193
SISA 262A
SISA 264
SISA 344
SISR 1994

Case References:

Australian Prudential Regulation Authority v. Derstepanian and Anor
[2005] FCA 1121
60 ATR 518

Australian Prudential Regulation Authority v. Holloway and Anor
[2000] FCA 1245
(2000) 45 ATR 278

Case 47/94
94 ATC 417

AAT Case 9689
(1994) 29 ATR 1086

Re QX971 and Australian Prudential Regulation Authority
[1999] AATA 6
(1999) 54 ALD 487

Re Pruess and Australian Prudential Regulation Authority
[2005] AATA 748
(2005) 60 ATR 1137

Authorised by:
Lys Cleaver
Assistant Commissioner
Superannuation Risk, Information and Practice Management