It pays to play ball with the ATO

In an article in Smart Investor (Australian Financial Review, 11 February 2015) Chris Malkin emphasised that the annual audit of superannuation funds is an integral, and increasingly important, component of the superannuation industry. It adds to the integrity of the Australia’s retirement incomes systems, of which superannuation is part, as well as the taxation system which provides incentives to save for retirement via superannuation by granting very generous taxation concessions.

Auditing is a serious business that trustees must pay attention to.

Under self-assessment, the ATO does not review a SMSF’s individual records to check if trustees are doing the right thing, unless it absolutely has to. The ATO relies on the superannuation legislation that requires trustees to appoint and pay an independent financial expert, an accountant with audit qualifications, to review their fund before the annual return is lodged. Where an auditor identifies problems that breach the laws, those laws require the auditor to report the contravention to the ATO. About 2% of funds attract such reports annually. In the 2013/4 year, 8,800 funds were reported as breaching with a total of 22,000 contraventions.

Malkin said that, from his experience, trustees who are used to running their own SMSFs generally know the rules and will know when they have taken them to the edge. “They often don’t need an auditor to tell them that they have done the wrong thing. That’s when a main role of the auditor then becomes helping the trustee correct their mistakes”.

Most breaches involve a SMSF lending its money to, or investing in a member or a relative or their business, buying a restricted asset from a member or relative or not conducting transactions in a commercial “arms- length” manner. An increasing number of breaches involve accessing a fund’s money before a member is legally entitled to.

Under the new penalty regime, all SMSFs that attract an Auditor’s Contravention Report in which the auditor is required to report a breach, will be contacted by the ATO as part of its program which classifies a breach, and the SMSF, as being high, medium or low risk.

All high-risk funds will be subject to a comprehensive audit by the ATO who has limited discretion as to whether or not to impose a penalty. If the breach is confirmed and the trustees have not acted to rectify it, or do not heed the auditor’s advice, a hefty penalty will probably apply.

Where breaches (and thus, funds) have been assessed as being medium risk, the trustee can expect a phone call from the ATO suggesting that the trustee voluntarily rectifies the breach. No penalties may apply if this suggestion is heeded.

Low risk funds will receive a letter from the ATO reminding the trustees of their responsibilities and encouraging them to comply with the rules in the future. No penalty will be issued under these circumstances.    However, if these funds attract the attention of the ATO in future years, they can expect an elevation in risk, more scrutiny and the possible imposition of very hefty penalties.

Although the ATO continues to seek the correct outcome for the trustees, the way it chooses to treat them will depend on how they respond to the ATO’s calls and the extent of co-operation received from trustees regarding the reported breaches.

If the ATO calls and the trustee gives the impression of being hesitant, or being unaware of the seriousness of the breach, or does not know about the breach, the ATO may elevate the fund from a medium risk to a high risk fund.

Similarly, trustees of high risk funds should engage with the ATO in a cordial and cooperative manner, which may seem counterintuitive to some trustees, but may assist in mitigating the consequences of the ATO’s investigation. 

As Malkin agrees, it pays to play ball with the ATO.

Baumgartner Super is pleased to discuss any matter to do with audit, breach rectification and dealing with the ATO with you.