The directions the ATO can issue

Two directions are common. A rectification direction requires a person to take specified action to fix a contravention within a set time and to provide evidence they have done so. An education direction requires a person to complete an approved SMSF Trustee education course within a set period and provide proof, and trustees are typically also required to re-sign the ATO trustee declaration confirming they understand their duties.

The nature of a direction

Failing to comply with a rectification or education direction is a strict Liability offence, which means it can attract a penalty regardless of intent, and continued non-compliance can lead to more severe action, including disqualification or the fund losing its complying status. The compliance period begins when the direction is issued.

Professional involvement

Accountants, auditors or licensed advisers can assist in understanding precisely what the ATO expects, designing a rectification that resolves the breach, and communicating with the regulator. Interpreting and satisfying a technical direction without assistance carries a risk of missing part of what is required.

Rectifying the breach

For a rectification direction, the underlying contravention needs to be fixed completely. Depending on the breach, that might mean unwinding a prohibited transaction, disposing of an in-house asset to return within the 5% limit, or correcting how an asset is held. Clear evidence of each step is required to demonstrate compliance to the ATO.

A hypothetical example

Consider a hypothetical fund that receives a rectification direction after its in-house Assets drifted above the 5% limit. The trustees prepare a written plan to reduce the in-house asset to within the limit by a set date, execute it, and keep records of the sale and the fund's new asset position, then provide this evidence to the ATO within the timeframe.

Meeting the deadline

Deadlines in directions are firm. If a deadline cannot genuinely be met, engaging with the ATO about it is relevant rather than letting it lapse. Copies of everything submitted should be kept, with confirmation that the ATO has received what it needs.

The consequences of no response

Because non-compliance with a rectification or education direction is a strict liability offence, taking no action can attract a penalty in its own right, on top of whatever the original breach involved. It also signals unwillingness to comply, which makes more serious action — such as disqualification or a notice of non-compliance that strips the fund's concessional tax status — more likely.

What follows resolution

Once the direction is satisfied, identifying how the breach happened and reviewing processes can reduce the likelihood of a repeat. This can include considering whether additional professional support or a change in trustee structure would reduce future risk.