ATO crackdown on outstanding SMSF annual return (SAR) lodgements

The ATO has announced that it will be sending an initial letter to trustees letting them know which SAR lodgement years are outstanding and what actions need to be taken. The article outlines the SAR lodgement obligations of an SMSF, and the consequences of non-lodgement.

What are your SAR lodgement obligations?

An SMSF needs to lodge a SAR once the audit of the SMSF has been finalised. The SAR is more than an income tax return. It is also used to report super regulatory information, member contributions and pay the SMSF supervisory levy.

The ATO's firm 3 stage approach to the non-lodgement of SARs

On 25 February 2021, the ATO released a publication explaining its approach to the non-lodgement of SARs. The approach will essentially involve 3 steps:

1. First letter- the ATO will send an initial letter to trustees letting them know which lodgement years are outstanding and what actions need to be taken.
2. Second letter- if the ATO does not receive a response to the initial letter within the specified time frame, the ATO will send a second letter warning of the consequences of non-lodgement for the SMSF and its trustees. Some of these consequences, such as penalties, are set out below.
3. Third letter - if the ATO does not receive a response to the second letter, the ATO will follow up with a third letter asking the recipient to 'show cause' as to why the ATO should not apply the previously advised penalties and courses of action.

What are the potential consequences of the non-lodgement of SARs?

Failure to lodge a SAR may result in a number of consequences, including the following:

1. Failure to lodge penalties for each overdue year

   Failure to comply with subsection 35B(1) of the Superannuation Industry (Supervision) Act 1993, which relates to the need to prepare accounts and statements, may attract an administrative penalty of 10 penalty units.

2. Raising a default assessment for each overdue year, with penalties

   A default assessment is an assessment that is made by the ATO based on its own (generally incomplete) data. This may not be a favourable outcome for a number of reasons including the fact that the assessment will not reflect the SMSF's actual data (particularly in the nature of expenses) in the relevant year. Penalties may also be imposed.

3. Issuing a notice of non-compliance

   Notices of non-compliance are issued for serious contraventions of superannuation law. Making a fund 'non-complying' has significant financial impacts on the SMSF and its members because, for example, for every year that the SMSF remains non-complying, its assessable income will be taxed at the highest marginal tax rate, and an assessment is also made on the balance of the capital in the SMSF in the year it becomes non-complying.

4. Disqualification of the trustee

   The ATO may disqualify an individual from acting as trustee or director of a corporate trustee, if they have contravened superannuation law. It is an offence to continue to act as trustee or director of a corporate trustee, if you have been disqualified and further penalties may be applied, and this will also mean the person can no longer participate in an SMSF.

Why is the ATO adopting this firm approach?

The ATO has stated that non-lodgement behaviour is an indicator that there may be other contraventions by the SMSF. The ATO is therefore concerned with upholding the integrity and accountability of the sector and ensuring that SMSF's are compliant with superannuation law in all respects.

What do you need to do?

While the ATO is adopting a firm approach towards the non-lodgement of SARs, the ATO is also giving trustees and SMSFs the opportunity to rectify their lodgement history before any adverse action is taken by the ATO as shown by the 3 stage approach outlined above.

With that said, we encourage you to be proactive and review your SMSF's SAR lodgement history even before you are contacted by the ATO.

If, following the review, you identify that you are having (or have had) difficulties preparing and lodging your SARs, the ATO encourages you to contact them and they will help you get back on track.

It is important that you seek professional assistance, cooperate with the ATO and take your lodgement obligations seriously to minimise the risk of the adverse consequences outlined above being taken against you or your SMSF.

More information

• Further information about the lodgement of SARs is available on the ATO's website here.

• You may wish to review the following useful ATO publications:

  • We are contacting SMSFs with outstanding SARs; and
  • How we deal with non-compliance
• You may contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw Articles on a range of topics, including the following topics which you may find relevant:

• April 2021 changes for SMSFs; and
• Making member contributions from JobKeeper into your super.

Order related document packages

• SMSF Minutes and Resolutions Package
• SMSF Pension Commutation
• SMSF Pension Pack
• Superannuation Trust (SMSF)
• Update to SMSF