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Compliance & Regulation

New penalties make regulator discretion uncertain

The Australian Taxation Office’s (ATO) new penalty regime involving the imposition of fines on SMSF trustees for compliance breaches may eradicate the use of discretion by the regulator in certain circumstances, according to an industry professional.

Heffron SMSF Solutions head of customer Meg Heffron used the situation where an SMSF had breached the in-house asset rule as an example of how the ATO’s treatment of a compliance problem might change now its enforcement measures had become broader than just being able to make the offending fund non-complying.

Heffron described a situation where business real property had become an in-house asset due to a significant component of it being used for residential tenancy resulting in the fund’s in-house asset level exceeding the allowable 5 per cent.

Under that scenario, she said the most convenient solution would be to remove the tenant to restore the asset to its business real property status, however, that course of action was not actually allowable by law.

“This is one of those provisions where the legislation doesn’t just say ‘this is a problem, you deal with it’, it says ‘this is a problem, this is how you must deal with it’,” she explained.

“And the wording in the legislation is you must prepare a written plan to sell the excess and then carry it out.”

Despite that, she said trustees had been known to try to rectify the situation by simply removing the tenant and then letting the ATO know about the course of action taken to exonerate themselves in the event the regulator might exercise its discretion and take no further action.

“One of the things trustees do is kick the tenant out, report the breach, say they haven’t prepared a plan and they haven’t carried it out, and see if the tax office will allow it,” she said.

“So they basically said we’re going to breach the law by not formulating a plan and certainly not carrying it out, but we’re going to tell you in advance that we’ve actually fixed the problem as well and often that’s all the ATO care about.

“Now what’s going to be really interesting in a post-penalties world is whether the ATO say ‘that’s fine, but we’ll still impose the associated penalty’.”

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