SMSF Compliance: What Are Trustees Responsibilities?

How can SMSF trustees know what areas the ATO is particularly concerned about?

Fortunately, technology is our friend when it comes to what the tax office is looking for, because we can go onto the ATO website and of course most of us get regular updates either on a daily, weekly, monthly basis. So usually we’ve got a pretty good idea what the tax office red button issues are.

There’s a variety – like we’ll go through a period where the tax office is concerned about, say, limited recourse borrowing arrangements or areas that have caused enormous concern in recent times are the NALI (non-arm’s-length income) and the NALE (non-arm’s-length expenses) rules. So they’re the known knowns, they’re the areas that are of real concern to us. Some of them are likely to be things like pulling money out of a fund when we shouldn’t or alternatively making inappropriate investments. So the range of issues is actually very large.

What should trustees do if they are concerned they may have broken the rules?

I break the process in dealing with the ATO into two steps. One is, should we do something if we’re a little bit anxious, a little bit concerned, should we do something before we get a tap on the shoulder from the tax man? And that’s what I’ll call early engagement. And there’s actually a lot of limbs, if you like, to the concept of early engagement. And what I would say is engage early, engage early, engage early.

Then, if we do find that we’ve got a problem with the tax office, then we can go down what I’ll call the traditional dispute resolution procedures. And we almost know at the outset it’s going to be timely or very time-consuming, and it’s going to be expensive, and there’s going to be a lot of anxiety and angst along the way.

So that really says to us, if we have a fair sense that that’s going to happen, whether we ultimately win or lose, then maybe we should think about some alternate dispute resolution options. And that’s where it gets interesting.

In some situations, it might be we seek a private binding ruling. There are public rulings, there are private rulings, there are oral rulings. There are other situations, though, where we can’t seek a ruling because the legislation isn’t all-encompassing. It doesn’t cover all of the situations where we’d like a ruling. But fortunately, there’s a thing called administratively binding advice.

Very often, the contact with the tax office will be through the tax agent. Now it could be they’ll engage a specialist like me and I’ll be behind the screen; I might draft something and the tax agent might then lodge it under the tax agent’s name because it’s easier that way. The tax agent is known, it’s on the ATO system.

In another situation, it might be that the client provides a release, if you like, to the tax office to deal with me not being the tax agent. So therefore, I can assist. And the same happens with other advisers, other specialist advisers. And then from there, it might be, we lodge a ruling request. It might be we use the early engagement request email address for the tax office, which kind of opens up a door for not a private ruling, but for early engagement advice, if the tax office will deal with us.

And there’s a question there because there’s a bit of a gap as to when early engagement might work, that is, early engagement that isn’t a private ruling. There are some gaps there as to when there’s a tax office gateway, if you like.

What are some of the penalties that the ATO can impose?

The penalties are kind of scary because if the fund becomes non-complying, people will generally be aware that we could lose 47% of the assets of the fund. Penalties might be less than that. But perhaps one of the really unsettling things is if the tax agent has been, if you’re like, playing outside the bounds, then when we look at the penalties that could be imposed, for individuals, they could be more than a million dollars, or for an incorporated body, that could be over $5 million. And of course, our meal ticket is at risk as well.

So the penalties are absolutely daunting. So if ever there was a space to get this right, the superannuation space is where we’ve really got to get this right.

Any tips for trustees when dealing with a dispute with the ATO?

Back to my earlier comment, if you’re at all unsure, do two things. First of all, be or become an expert, a subject matter expert. Or if that’s not feasible, or even if you are, but you’d value a second opinion, get a second opinion from an expert. So make sure what the technical position is as best you possibly can.

Then, from there, engage early. So early engagement, early engagement, that’s what it’s all about. I would much rather deal with someone from the tax office where I’m on the front foot and I’m saying: “Hey, I want to work collaboratively with you to resolve this issue. We want to attend to our tax obligations”, than have a similar discussion on technical issues with a tax auditor who’s got out of bed in the morning wanting to make adjustments because after all, that’s his or her day job. I’d much rather engage early.

The only other thing I’d say is if the wheels fall off the cart and we have a dispute, it’s going to be expensive. So think about alternate dispute resolution options. And one of those might be what’s called in-house facilitation. And what that means is someone from the tax office who is not connected with the audit or the review. Someone from the ATO who’s trained as a facilitator. So they’re not really independent, but they’re kind of held out as being independent.

But someone else from the tax office gets involved. It brings the parties together, let’s say the tax office auditors and me, as the adviser, might have my client with me. Bring the parties together to determine what the issues are, make sure we’re focused on the same issues, see where the differences are, see where the common ground is and see whether we can come to some sort of agreement. That’s kind of how in-house facilitation works.

Can it work? Yes, it can. Is it the answer to a maiden’s prayers, as they say? Not always. Have I had success down that path? Yes, I have. So I’d say give some thought to that. Because the alternative is tax disputes always take a lot of time and they’re always costly. And the only one who wins is the adviser from charging all of the fees. Not the poor client, the poor taxpayer.