So you have an ACR – what happens next?

When you receive advice that your auditor has identified SIS compliance breaches in your fund and will be reporting the issues to the ATO in an auditor contravention report (ACR), it’s highly likely you will be asking the question “what happens next?”

The ATO uses a risk model to determine the appropriate action to take with each ACR. The model draws information from the ACR, tax return and other data. Using this, the SMSF will be considered as low, medium or high risk, with the response from the ATO escalated accordingly.

Any fund with an ACR will receive a phone call or a letter shortly after lodgement by the auditor. The actions of the trustees at this stage of the process will greatly influence the ATO’s next steps.

Trustees of low risk SMSFs will be reminded of their obligations and future compliance requirements. These matters are usually dealt with by letter and closed within 6-8 weeks of lodgement of the ACR.

The ATO will engage directly with trustees of medium risk SMSFs through discussion and written correspondence. If the ATO can be assured that the trustees understand their obligations, it is likely the ACR will be closed with no penalties imposed (normally within 6-8 weeks). It is important to note that if you do not engage with the ATO then this may result in stronger action, including a comprehensive audit of your SMSF.

If the ATO considers it necessary to take stronger action, there are a number of avenues open to them, including:

  • Education direction – you will be required to undertake an approved course and provide a copy of the completion certificate to the ATO.
  • Rectification direction – you will be required to rectify a contravention with a specified action and to make arrangements to ensure that no further contraventions of a similar kind will occur.
  • Enforceable undertaking – the trustees are required to initiate an undertaking, in writing, to rectify a contravention. The undertaking must include criteria outlined by the ATO. The ATO can decide whether or not to accept the undertaking, depending on a number of factors including the history of the fund and the nature of the contravention.
  • Administrative penalties – the ATO can impose significant financial penalties on the trustees, e.g. $10,800 for contravention of s67(1) Borrowings. The penalty cannot be paid or reimbursed from the assets of the fund. Directors of corporate trustees are jointly and severally liable. Importantly, individual trustees are each liable to the penalty. Therefore, if your SMSF has four individual trustees, you will each be required to pay $10,800.
  • Disqualification of a trustee – the ATO may disqualify and individual as a trustee if they have contravened super laws.
  • Civil and criminal penalties – the ATO may apply through the courts for civil or criminal penalties to be imposed.
  • SMSF wind up – the ATO may allow the trustee to wind up an SMSF and rollover remaining benefits to an APRA fund.
  • Notice of non-compliance – if the ATO makes a fund non-compliant, there will be tax consequences as assessable income is taxed at the highest marginal tax rate. In the year that the SMSF becomes non-complying, it assessable income includes 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 fund’s taxable income.
  • Freezing an SMSF’s assets – this may direct the trustee to deal with assets in a particular way.

It is important to engage with the ATO to work through your ACR. Failure to do so could result in a lengthy audit with significant personal financial penalties for trustees.

The ATO have recently launched a new voluntary disclosure service to allow Trustees to engage with the ATO more proactively. Information on this service is available via the ATO website.

 

 

 

Sources:

https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/How-we-deal-with-non-compliance/

https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/Past-webinars-for-professionals/New-compliance-treatments—June-2014/?page=2

https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/SMSF-early-engagement-and-voluntary-disclosure-service/

 

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