What happens when a fund is reported to the ATO
An explanation for accountants and professionals of what follows when an auditor lodges a contravention report, and the range of outcomes a fund may face.
By Tash ·
When an SMSF auditor identifies a serious breach, they may be required to report it to the regulator in an approved form. For trustees and their advisers, the natural question is what happens next. This article explains the process from the contravention report through to the possible outcomes.
How a fund comes to be reported
The auditor does not report every breach. They apply a set of reporting tests, and a contravention is reported where it meets one of them, for example where it remains unrectified, where it exceeds a value threshold, or where the fund is newly established and the breach exceeds a small amount. Importantly, the dollar size of a breach does not on its own decide the matter; a small breach can be reportable, and a contravention can be reportable even after the trustees have fixed it. The auditor lodges the report and also tells the trustees.
The regulator assesses the risk
A contravention report does not trigger an automatic penalty. The regulator assesses each report against its view of the risk the fund presents, taking into account the nature and seriousness of the breach, whether it has been rectified, the fund’s history, and the trustees’ apparent willingness to comply. Many reported contraventions, particularly minor ones that have been rectified, result in no action beyond the regulator noting the matter.
Where the regulator decides to act, the trustees can usually expect to be contacted within a number of weeks of the report. The contact may seek further information, an explanation, or a commitment to rectify.
The range of outcomes
The regulator has a graduated set of responses, and the outcome depends on the seriousness of the breach and the trustees’ conduct.
At the lighter end, the regulator may simply record the matter, or accept that a rectified breach needs no further action.
It may direct the trustees to undertake education about their obligations, which is a common response to a first or less serious breach by trustees who appear willing to comply.
It may issue a direction to rectify the breach within a set time, requiring the trustees to take specific action to bring the fund back into compliance.
It may apply administrative penalties, which are financial penalties imposed on the trustees for specified breaches.
For more serious matters, it may require the trustees to enter an enforceable undertaking, or it may make the fund non-complying, which carries a heavy tax consequence on the fund’s assets and income.
At the most serious end, it may disqualify a person from acting as a trustee, which prevents them from running an SMSF.
The auditor’s continuing role
The auditor’s responsibility is to identify and report the breach, not to determine the outcome. Once the report is lodged, the matter is between the trustees and the regulator. The auditor will, however, look at whether a reported breach has been rectified in the following year, and an unrectified breach that was previously reported can be reportable again.
What advisers should do
For an adviser whose client fund has been reported, the priority is usually to rectify the breach promptly where it can be rectified, to document the steps taken, and to respond fully and promptly to any regulator contact. A cooperative, rectifying trustee generally fares far better than one who ignores the matter. Where a breach cannot be undone, demonstrating that the trustees understand it and have taken steps to prevent a recurrence is the constructive path.
The bottom line
A contravention report starts a risk assessment, not an automatic penalty. Outcomes range from no action, through education and rectification directions, to penalties, non-complying status and, in the worst cases, disqualification. The trustees’ response matters: prompt rectification and full cooperation are the best way to keep an outcome at the lighter end of the range.
This article is general information for professional readers and is not advice on any specific fund. The superannuation legislation governs, and the regulator’s response depends on the circumstances of each case.
Common questions
- Does a contravention report mean an automatic penalty?
- No. A contravention report starts a risk assessment, not an automatic penalty. The regulator weighs the nature of the breach, whether it has been rectified, the fund's history, and the trustees' willingness to comply before deciding whether to act.
- Can a breach be reported even after the trustees have fixed it?
- Yes. A contravention can be reportable even after it has been rectified. The dollar size of a breach does not decide the matter on its own, and a small breach can still be reportable.
- What outcomes can a reported fund face?
- Outcomes range from no action, through trustee education and rectification directions, to administrative penalties, enforceable undertakings, non-complying status, and at the most serious end disqualification of a trustee.
- What should an adviser do if a client fund is reported?
- Rectify the breach promptly where it can be rectified, document the steps taken, and respond fully and promptly to any regulator contact. A cooperative, rectifying trustee generally fares far better than one who ignores the matter.