Self-managed super funds (SMSFs) have grown spectacularly in recent years and that growth seems to be continuing. However, the key regulator of the sector, the Tax Office, continues to remind funds about compliance and related issues.
This is not a new theme. There have been many warnings in the past and presumably will be more in the future. So, what are the problem areas?
While the ATO sees voluntary compliance as a key component of SMSF compliance, that really only goes so far.
Auditing of SMSFs is high on the ATO’s agenda. On that score, the ATO is involved in a pilot program that provides a premium enquiry-answering service for approved SMSF auditors, which will run until the end of November 2010 and will involve 40 auditors. The ATO will also review 100 mid-range SMSF auditing practices.
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ATO experience over the last few years has showed that fund auditors with few clients generally performed more poorly than the rest of the auditor population. The ATO has identified some 3,000 auditors who audit two or fewer funds each year.
Simple things like lodging the fund’s annual return can also be a problem. For instance, last financial year, 196 trustees who failed to meet their fund’s lodgment obligations were convicted.
Concerning lodgment of the SMSF annual return, the Tax Office has begun a pilot exercise involving nearly 250 SMSFs who it deems “serial non-lodgers”. In this regard, ATO analysis of tax agent lodgments (which make up the vast majority of SMSF lodgments) was that while the lodgment rate for SMSFs is higher when compared with the rate for their whole client base, on-time lodgment “is not as good”. As a result, the ATO will be further ramping up its focus around on-time lodgments.
The ATO also has a current focus on the penalties applicable in cases of early release of superannuation benefits, including for promoters of early release schemes. For example, a NSW woman was sentenced to 12 months jail after pleading guilty to nine charges laid by ASIC. The charges related to the distribution of more than $260,000 to nine people and receiving just over $70,000 in commissions.
Excess contributions tax
ATO Deputy Commissioner, Neil Olesen said that, more recently, the ATO’s focus has shifted towards identifying people who have exceeded the contributions caps. The ATO has raised excess contributions tax (ECT) assessments where necessary. In this regard, the ATO has identified about 40,000 people who potentially exceeded the caps in 2007-08 and about 30,000 in 2008-09. As the tax and accounting bodies know only too well, this is an ongoing problem area that is causing pain and concern to many.
One reason for the greater than expected number of people identified as potentially having excess contributions is the apparently poor reporting practices by funds. An example of this includes reporting that all contributions have been made for one member where it was intended to split the contributions between a husband and wife.
According to Olesen, the primary instance of this is the reporting of personal contributions and employer contributions. Initially, he said the ATO identified that many funds were reporting personal contributions where the fund member intended to claim an income tax deduction as employer contributions, because it resulted in the fund getting the right income tax result.
However, he said this was clearly wrong in terms of meeting their contributions reporting obligations and caused many members to appear to have excess contributions. The ATO is hoping fund member feedback will have corrected this error in future years.
The ATO has also seen examples of funds not obtaining enough information from the contributor to ensure they report correctly. For example, there have been cases along the lines of the member sending a cheque to their fund for $550,000 and advising the fund that $100,000 was “concessional” and $450,000 was “non-concessional”.
The fund assumed this meant that the $100,000 was an employer contribution when in fact the member was (rather unclearly) trying to tell the fund that they were intending to claim an income tax deduction for the amount.
As a result of these kinds of errors, the ATO has seen significant re-reporting of contributions, with about 10% of fund member contributions statements associated with a potential ECT liability being amended. While much of the re-reporting is to correct errors, the ATO is concerned that some of the fund information that is re-reported:
- is not correct;
- occurs immediately after the ATO has notified the member that they may have an ECT liability and some years after the original contributions were made and reported;
- is aimed at reducing or removing the liability “inappropriately”.
While much of the re-reporting concern relates to the SMSF sector, Olesen said the ATO is also seeing some instances where larger super funds are incorrectly reclassifying contributions reported immediately after the ATO had notified the member that they may have an ECT liability. This re-reporting is occurring many months (and in some cases two years) after the original contributions occurred.
As a result, the ATO is intensifying its scrutiny on the re-reporting of contributions data by SMSF trustees as well as by larger APRA funds.
“Our sense is that the split between APRA fund and SMSF re-reporting is about 50/50,” Olesen said. Having said that, he said the ATO considers the issue with SMSFs to be “materially more significant – because they lack arm’s-length arrangements and comprise less than 10% of members”. The ATO’s message is simple: “fund trustees should be vigilant about ensuring the validity of requests from members to re-report contributions data”.
Trustees and related party dealings
The ATO says it usually finds that the non-compliance relates to some form of transaction or dealing with a related party. For example, despite there being a clear prohibition on lending or providing financial assistance to fund members or relatives, this remains the most commonly reported contravention of the law.
When the ATO looks at these funds, it examines whether the arrangement is actually a loan. It has found that an early access breach has occurred about a quarter of the time. In these instances, in addition to any action the ATO takes against the fund, the trustee(s) will be assessed personally for these amounts and may incur a tax liability. The ATO will be looking very closely at loan cases this year, including with an eye to prosecution action where the circumstances warrant it.
Breaches of the in-house asset rules are also a problem. While the ATO says it will often work with these trustees to get them back on track, where the breaches are significant, the ATO has imposed serious sanctions, such as making the fund non-complying, with the resultant tax penalties. A significant number of the 185 funds the ATO made non-complying last financial year had breached the in-house asset rules.
Running a self-managed super fund is not necessarily that simple. There are many rules and laws to be observed and the Tax Office is stepping up its efforts to ensure the laws are being complied with. Those with such funds, or contemplating setting them up, need to consider this carefully. That’s not to say don’t do it, but be fully aware of what is involved and take good professional advice.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions .
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