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ATO compliance action penalties for SMSFs

By Gary Chau, Lawyer and David Oon, Senior Associate, DBA Lawyers

This article looks at the actions and penalties the ATO can impose on trustees of self managed superannuation funds (‘SMSF’). In 2014, a new regime added the following compliance powers to the ATO’s arsenal:

  • Education directions
  • Rectification directions
  • Administrative penalties

In addition to the above, the ATO has the following compliance powers to deal with trustees of SMSFs who have not complied with superannuation laws:

  • Enforceable undertaking
  • Disqualification of a trustee
  • Civil and criminal penalties
  • Allowing the SMSF to wind up
  • Notice of non-compliance
  • Freezing an SMSF’s assets

In this article, we will refer to trustees of the SMSFs in the plural, but each reference equally applies to each trustee of an SMSF. It is helpful to remember here that the ATO do not distinguish between ‘active’ and ‘passive’ trustees when applying compliance action, but they can consider these matters when it comes to remitting penalties.

In practice, the ATO generally issues penalties where they detect contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) or Superannuation Industry (Supervision) Regulations 1994 (Cth).

The ATO is generally made aware of contraventions via the fund’s auditor, who is obliged to report all contraventions that meet the reporting thresholds. In broad terms, the substantial or ongoing contraventions are required to be reported.

Where the contraventions come to the attention of the ATO, the ATO can impose the following penalties on trustees. We now explore each of the ATO’s compliance powers briefly below.

Education directions

The ATO can direct trustees to undertake education. Education directions may be appropriate when the contravention appears to have occurred due to the trustees’ lack of understanding of the key obligations and concepts in the SISA, ie, sole purpose test.

Broadly, all trustees are treated as if they are aware of all the potential contraventions of the SISA, whether or not they actually have a good knowledge of the law. Thus, where trustees are not aware of the rules or have identified a contravention in their fund, it would be highly recommended that they take the initiative and consider undertaking an approved education course. These courses are available for free and online via the ATO’s website here. These courses can be undertaken even if the ATO has not directed the trustees to take an education course and even where no contraventions have been identified in the fund.

Generally, the ATO impose this penalty in addition to other compliance protocols. For example, the trustees could be directed to undertake education, rectify the contravention via a rectification directive, and pay an administrative penalty.

Rectification directions

Rectification directions allow the ATO to direct trustees to rectify a contravention and put into place managerial or administrative arrangements to ensure there will be no repeat contraventions. These directions usually require the trustees to provide evidence of their rectification within the specified timeframe to the ATO, generally six months.

The ATO generally welcome trustees that take the initiative, particularly trustees that provide the ATO with an enforceable undertaking. An enforceable undertaking may be more beneficial for trustees that wish to propose how they intend to rectify a contravention and don’t want to wait for the ATO to issue a rectification direction.

When considering whether to issue a rectification direction, the ATO take into account the following:

  • any financial detriment that might reasonably be expected to be suffered by the fund as a result of the person’s compliance with the direction;
  • the nature and seriousness of the contravention; and
  • any other relevant circumstances.

Where trustees wish to vary an ATO rectification direction, they can make a request in writing on or before the period specified in the direction. The request must be signed and dated and must contain the reasons for making the request. Further, trustees can also object to the ATO’s rectification direction or decision to refuse to vary a rectification direction.

Administrative penalties

Under s 166 of the SISA, the ATO can impose administrative penalties on the following provisions (and next to each item is the maximum penalty) including:

  • Lending to members of regulated superannuation fund: 60 penalty units
  • Borrowing: 60 penalty units
  • In-house asset rules: 60 penalty units
  • Duty to keep minutes: 10 penalty units
  • Duty to keep records of change of trustee: 10 penalty units

A penalty unit is currently $210 but increases with the consumer price index. For example, 60 penalty units are currently $12,600.

Where an administrative penalty is imposed, individual trustees or directors of corporate trustees are personally liable. Therefore, the penalty cannot be paid or reimbursed from assets of the fund. Directors of corporate trustees are jointly and severally liable to the penalty, whereas individual trustees are each liable to a penalty. This means that a corporate trustee with two directors will get one penalty overall, but two individuals will get a penalty each. It is generally preferable therefore to have a corporate SMSF trustee. In regard to collecting the penalty from directors, the ATO may collect the entire penalty from any one of the directors of the corporate trustee or from all directors in various amounts, until the penalty is paid in full.

The ATO has the discretion to remit penalties in part or in full. The circumstances where the ATO will not remit administrative penalties include the more serious cases, for example where the ATO see the following:

  • indicators of ongoing non-compliance;
  • the trustees’ unwillingness to recognise the issue and engage with the ATO; or
  • where it has remitted a penalty previously.

Trustees may object to the ATO’s decision not to remit or not to remit in full the administrative penalty by seeking a review of the ATO’s decision. Broadly, a review of the ATO’s decision usually means that the matter is then referred to and adjudicated by the Tribunals or the Courts.

Other penalties

The ATO has the power to disqualify people where it is concerned with the actions of an individual or their suitability to be a trustee. When deciding whether to disqualify a trustee, the ATO will take into account how serious the contraventions are, how many contraventions have occurred and how likely it is they will continue to be non-compliant. An individual may be disqualified as a trustee for not being a ‘fit and proper person’.

For more information about when a person becomes a disqualified person and the consequences of being a disqualified person in the context of SMSFs, have a read of this article, ‘Are you disqualified from having an SMSF?’

The ATO also has the power to issue a notice of non-compliance where there are serious contraventions of the superannuation laws. Broadly, a fund remains non-compliant until a notice of compliance is given to the fund. Note, that a non-complying superannuation fund will lose its concessional tax treatment that applies to the low tax component of a complying superannuation fund. Additionally, a large tax bill is typically received in the year of non-compliance. The ATO states in this regard that ‘in the year that it becomes non-complying, [a fund] includes in its assessable income an amount equal to the market value of the fund’s total assets less any contributions the fund has received that are not part of the taxable income of the fund’.

The ATO can also seek a civil penalty order by making an application the Courts, particularly for severe contraventions of the law. Civil penalty provisions may also be relevant where the ATO’s decision in regard to an administrative penalty is subject to review.

SMSF early engagement and voluntary disclosure service

Trustees do not need to wait for the ATO to be involved. In fact, where an issue or contravention is identified, one avenue to consider is the SMSF early engagement and voluntary disclosure service. The ATO state ‘[i]f you voluntarily disclose unrectified contraventions before we commence an audit, your disclosure will be taken into account in determining the enforcement action we take and the appropriate level of remission of administrative penalties’.

The ATO note that trustees that use the SMSF early engagement and voluntary disclosure service may avoid the more serious outcomes. Generally, the SMSF early engagement and voluntary disclosure service involves:

  • engaging with the ATO;
  • working with professionals, such as lawyers, to rectify; and
  • putting processes in place to ensure future compliance.

The ATO state that they must be provided with all relevant facts, supporting documentation and a rectification proposal (or proposed enforceable undertaking), and require the trustees to be actively engaging with the ATO throughout the resolution process.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit or call (03) 9092 9400.

1 March 2018

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