Greater enforcement to rectify contraventions a key part of the new SMSF landscape

The powers provided to the Australian Taxation Office (ATO) to deal with issues of non-compliance by SMSF trustees has been reasonably inadequate, something that was acknowledged by the Cooper Review Panel as part of the Super System Review.  The ATO in many respects had been known to have two options in dealing with trustee contraventions:

  • the “feather duster”approach – where limited penalties or undertakings could be applied against SMSF trustees ;or
  • the “nuclear”option – where fund’s were made non-complying for more serious breaches

A key outcome from the Stronger Super reforms to take effect from 1 July 2012 is the greater powers to be provided to the Regulator when dealing with contraventions by SMSF trustees.  Currently, where the fund trustees have contravened part of superannuation law, it is the trustee that may enter into an Enforceable Undertaking (EU) with the ATO to remedy the breach.  The Regulator may then accept or reject the enforceable undertaking from the trustee.

This however changes from next financial year, where new powers will allow the ATO to direct a SMSF trustee to rectify a contravention where it remains unrectified.  These powers will provide the ATO with greater capabilities to improve the timeliness and efficiency of remedying these issues.

These powers will range from providing penalties and sanctions on fund trustees, where SMSF Annual Returns may be outstanding or more serious breaches including loans to members, in-house asset issues or breaches of financial assistance.  Part of this rectification process may also require SMSF trustees to undertake mandatory education to continue to carry on their role as a trustee.

Since taking over as Regulator of SMSFs in 2000, the ATO has taken an educative approach to ensure trustees understand and comply with superannuation law and their ongoing statutory requirements.  Whilst the education process plays an important part in the overall ATO compliance program, we will expect to see a greater role in enforcement to protect the integrity of this burgeoning superannuation industry.

12 things NOT to do with your SMSF

The ability to take control of your retirement savings is a key driver in the continued growth of SMSFs.  However, being a trustee comes with responsibility to ensure that your fund meets strict regulatory and compliance obligations.  Failure to meet these can result in significant penalties, along with the potential loss of the fund’s complying status.

Here is a list of 12 things not to do with your SMSF:

1. Do not setup a fund to illegally access your super

The approach taken to illegal early release of superannuation benefits by the ATO has seen a significant increase in the amount of people setting up SMSFs to gain access to their retirement savings.  Even with existing funds, it can be tempting to access money from the SMSF bank account where a business is in financial difficulty.  You should avoid this as significant penalties and criminal sanctions can be applied by the Regulator.  In addition, any benefits withdrawn are likely to be assessed personally at the highest marginal tax rate. It is important to remember that there are options available to access part of your superannuation under financial hardship or compassionate grounds.

2. Do not transfer residential property you own into your SMSF

This is one of the most common questions I get asked by individuals as people begin to take a greater interest of shifting wealth into superannuation.  Superannuation law does not allow for the acquisition of assets from members (s.66, SIS Act).  There are however exceptions to this rule including listed shares (until 30 June 2012), widely held trusts, business real property and in-house assets (up to 5%).  Residential property is not an exception and therefore not allowed to be acquired or contributed into the fund from a member.

3. Do not provide financial assistance to you or a family member from your SMSF

Another common question is whether a property purchased by Mum & Dad in their SMSF can be leased (at arm’s length) to a child or other family member.  Whilst the intention may be to deal on ‘commercial terms’ (arms-length) with the tenant, the fact that they are related prohibits the ability to do so.  You are deemed to be providing financial assistance, along with breaches of various other aspects of super law (e.g. sole purpose test).

4. Do not try to re-report contributions just because you’re now in an Excess Contributions Tax position

A key focus of 2011/12 ATO compliance program is to investigate re-reporting of contributions for members through the SMSF Annual Return.  An updated Superannuation Prosecution Plan for July 2011 to June 2014, outlined that the ATO intended to target issues of excessive contributions where SMSF members seek to avoid or reduce the excess contributions tax by falsely reporting contributions (including amending). You don’t want to find yourself on the wrong end of the stick with this issue – as penalties and criminal sanctions on top of an ECT liability will make things look very ugly!!

5. Do not lodge your SMSF Annual Returns beyond the due date

It must frustrate the ATO that year after year the on-time lodgement statistics are not better than what they are.  In a speech conducted by Stuart Forysth, Assistant Commissioner, Superannuation in September last year, he commented that 79.39% of all 2010 lodgements had been achieved by 5 July 2011.  That’s more 20% not done 12 months after the end of the financial year.  The ATO will be pleased with the increased powers they are to receive from 1 July 2012 via the Stronger Super reforms to penalise trustees for tardiness.  There is however scope for the ATO to enforce non-compliance on SMSFs, however this ‘nuclear’ option is rarely enforced.  See my previous post on this topic.

6. Do not have the title to a property held by the trustee where SMSF limited recourse borrowing arrangement is in place.  

I have heard of some ‘horror stories’ of how certain limited recourse borrowing arrangements have unfortunately been established.  Most common is the title to the acquired property is held in the name of the SMSF trustee, not the custodial trustee.  You must ensure the asset is held in the bare/holding trust whilst the loan is in existence, which means the title must be held by the trustee of the bare trust.  You need to consider state-by-state jurisdictions around stamp duty requirements, but I always recommend having the custodial trustee established before purchase (rather than rely on a nomination clause – as allowed in some states).

7. Do not use borrowed funds to make property improvements

With clarity in September 2010 by the ATO on key concepts with limited recourse borrowing arrangements, SMSFs can now make improvements to property assets to the extent that you don’t change it into a different asset (i.e. character and nature of property changes).  Importantly, SMSFR 2011/D1 confirms that improvements can be made with the SMSF’s own resources (e.g. cash), but not with borrowed funds – this is an important distinction between the two!!  s.67A(1)(a)(i) only allows for borrowings to be maintained for the acquisition of a single acquirable asset along with any associated costs in repairing or maintaining the asset – no improvements!!

8. Do not have the fund assets mixed up with your personal or business assets

All fund money and assets must be kept separate from personal or business money and assets. You mustn’t use the fund’s money for personal or business purposes under any circumstances.  This is a covenant with superannuation law to ensure that fund investments are made only to provide for members in retirement.

9. Do not have you super fund audited by the same tax agent that prepares your SMSF financials and Annual Return

The issue of independence within the SMSF audit community has been progressively improving through increases in professional standards requirements and now we’ll see further improvements through the Stronger Super reforms (ASIC auditor registration).  As a trustee you need to be conscious that it is highly probable that where an accountant providing the administration is also auditing the fund is in breach of their professional obligations (referring to APES 110 – Code of Ethics for Professional Accountants).  This is predominantly relevant to sole practitioners and smaller public practices.

10. Do not contribute into superannuation if your were 65 or older from 1 July 2011 and you have met the ‘work test’

Unless you meet a work test of completing 40 hours work within a 30 day consecutive period, you are in eligible take make personal contributions into super.  Any contributions made into superannuation cannot be accepted by the fund and must be returned.

11. Do not access your superannuation unless you have met a ‘condition of release’

We discussed illegal early release earlier, but it is important to understand that to access superannuation money by lump sum or pension you must meet a condition of release, for example retirement.

12. Do not take an amount less than your prescribed minimum pension for the financial year

The ATO has confirmed within tax ruling TR 2011/D3 that where a member does not meeting their minimum pension obligation for the financial year, the fund loses its tax exemption from the start of the financial year and all benefits are treated as lump sums.  This means that the fund moves from a 0% tax rate in pension phase back to 15%.  This will also affect the tax-free/taxable proportions of, the pension accounts, including where multiple pensions were running the accounts move back to a single member interest in the fund.

The Government’s Stronger Super reforms to take effect from 1 July 2012 are providing the ATO with greater powers to adopt a sliding scale administrative penalty regime based on the seriousness of breaches conducted by trustees.  It is commonly known up until this stage the ATO really only had two options to enforce compliance – a feather duster or the ‘nuclear’ option; there was no in between.  These new powers will allow the Regulator to determine how hard they need to hit to ensure trustees comply with their obligations, which may include mandatory education.

I’d be interested to hear from my readers further areas that trustees should ensure that they ‘steer clear’ of when it comes to maintaining the complying status of their SMSF?

Hints for preparing 2011 SMSF Annual Returns

With the annual compliance requirements for the 2010/11 financial year in full swing for SMSF trustees, it is an important reminder to ensure that fund information is being correctly reported to the ATO.

The ATO in their most recent newsletter (Edition 18) provided hints for trustees and tax agents in preparing SMSF Annual Returns.  It is important to remember the following when preparing a fund’s annual compliance requirements:

  • Ensure the fund auditor details are accurately completed and remember that you can’t lodge the SMSF Annual Return before the audit has been completed.
  • Ensure that the fund’s benefit structure is accurately reflected as an accumulation fund, not a defined benefit fund (unless it is paying a defined benefit pension to a member that had commenced prior to 12 May 2004).
  • If the fund is wound up during the financial year, ensure that the trustees disclose correctly that all outstanding debts have been paid, paid or transferred out all member’s benefits, and have lodged all previous year’s returns.
  • Ensure that income and expenditures are correctly shown  within the SMSF Annual Return at the appropriate labels.  Incorrect reporting could lead to unnecessary enquiry from the regulator.  For example, approved auditor fees are regularly shown as management and administration fees; a separate label (H) is to be completed for the cost of approved audit fees.
  • Ensure than information relating to all fund members are reported for the financial year even if their account didn’t receive contributions or they ceased to be a member.  Member TFNs must also be reported.
  • Do not report ‘nil’ assets unless you are reporting that the fund has wound up.
  • Ensure that investments are appropriately labelled accordingly to their asset type (e.g. listed shares).  Do not bundle them under ‘other’ categories if there is an appropriate label.
  • Any instalment warrant/limited recourse borrowing arrangement (LRBA) investment needs to be recorded at the ‘Derivatives and instalment warrants’ label – for example, if the LRBA is to acquire residential real property, the investment should not be recorded at the ‘residential real property’ label until the LRBA has been discharged.
  • Ensure than you as Trustee have read and correctly marked the Regulatory information (section J) regarding the operational status of the SMSF.   Penalties will apply for false or misleading information.

With the 2011/12 ATO compliance program targeting a range of issues from contribution reporting, exempt current pension income and related party investments, it is important to note of these hints to stay out of the focus of the Regulator.

Understanding your roles and responsibilities as a SMSF trustee

The ability to take control of your retirement has been the driving factor in the continuing growth of self-managed super funds.  They are a great way to provide for your retirement, but it is important to understand that with this greater control comes an increased responsibility as a trustee of your fund.

The ultimate responsibility of the fund always rests with the fund trustees, regardless of whether professionals such as accountants and financial advisers are engaged to assist you in operating the fund.  Therefore, it is very important that you understand what you need to do.

There are a range of duties and responsibilities that come with being a trustee and these include:

  • Making sure the fund’s sole purpose is to pay retirement benefits to members or to beneficiaries in the event of death
  • Accepting contributions and paying benefits as a pension or lump sum in accordance with superannuation and tax laws
  • Making investment decisions and complying with any restrictions contained within superannuation law and the fund’s trust deed
  • Ensuring an approved auditor is appointed for each income year
  • Making sure that the fund’s administrative tasks are met, such as lodging the SMSF annual return on time and ensuring the fund’s records are kept up-to-date; and
  • Reviewing and updating the fund’s trust deed and investment strategy

All of these responsibilities form part of the trustee declaration form that is required to be signed by all new trustees of a self-managed super fund.

Failure to comply with your duties and responsibilities can result in the Tax Office taking actions including imposing penalties, taking enforceable action against you including disqualification as a trustee and potentially even making your fund non-complying.

NB. Members of the SMSF Academy won’t have to worry as they will have available to them the appropriate information, education and tools to look after all of these issues that we have discussed.  The SMSF Academy is designed to give trustees the confidence and peace of mind to meet their duties and responsibilities as trustees.

Click here to register your interest about the launch of The SMSF Academy

What reporting obligations are required for my SMSF?

The Trustees of a self-managed super fund have various reporting obligations to both the Regulator and its members.  Many of these duties need to be completed for each financial year, by specified due dates with the Tax Office.

It is a requirement for all funds to have to lodge a SMSF Annual Return, which includes the tax return, reporting of each member’s contributions, information for the regulator about the fund and details of the auditor and completed audit.

It is important to note that the Annual Return cannot be lodged until an independent audit report has been issued.  The fund also has an obligation to prepare financial accounts each year, including the preparation of an operating statement and statement of financial position.  Upon completion of these statements, the fund arranges for the completion of an audit to examine the fund’s financial position and assess the overall compliance of the fund with superannuation law.  In addition, a self-managed super fund is required to prepare and maintain records relating to decisions affecting the fund.  For example, these may include decisions around buying and selling investments, starting a pension and the appointment of a fund auditor.

Copies of financial statements, the SMSF Annual Return and statements lodged with the tax office must be maintained by the fund trustees for a minimum of five years.  However, minutes of meetings, changes and appointments of trustees, declarations, and copies of all reports given to members must be kept for at least for 10 years.

Engaging Service Providers

Subject to your own level of skills and amount of time you have to devote to running your self-managed super fund, SMSF trustees can engage a variety of service providers to assist them in their duties and responsibilities.   For example, a lawyer will be required to prepare the trust deed for your SMSF, and would also be involved in many instances with the preparation of estate planning documentation including death benefit nominations.

Your fund will be required each year to engage an approved auditor to conduct an independent audit.  Most trustees will also typically also engage an accountant or specialist administrator to prepare the statutory reporting requirements for your fund including financial statements and SMSF Annual Return.  For pension paying funds, an actuary may be required to be engaged to prepare a certificate of tax exemption.    Trustees may also consider using a licensed financial adviser to assist in the strategic direction of the fund, the investment strategy and any insurance needs of the members.

The Australian Taxation Office as regulator of self-managed super funds has several publications available for trustees regarding thinking about, setting up and running a self-managed super fund.  These are must read documents for all trustees to ensure that they have an appropriate level of understanding about their roles and responsibilities as a trustee.

Links to these publications are shown below:

Applying the blowtorch to non-compliance

The past fortnight has seen two presentations by senior representatives of the Australian Taxation Office (“ATO”) to the SMSF industry.  These presentations have shed light for trustees and the profession as to some of the key concerns and target areas to ensure ongoing compliance within the SMSF sector.

I recently presented at the SISFA Forums in Brisbane and Melbourne where the Assistant Commissioner, Stuart Forsyth also presented.  His presentation on “Super funds and taxation: working together for effective compliance”, focused on some of the common contraventions, illegal early access, limited recourse borrowing arrangements, tax office discretionary powers and various other issues.

Neil Olesen, Deputy Commissioner of Taxation, also recently presented to the Institute of Chartered Accountants (“ICAA”) SMSF conference where his presentation “The ATO’s regulation of SMSFs – the compliance program, specific risks and other areas of focus” addressed issues surrounding approved auditors, trustees, illegal early release schemes, and various income tax matters.

You can already see from the areas covered within these speeches as to what some of the common themes are.  These are mostly consistent with the ATO’s compliance program outline for 2010/11 (see blog, “SMSFs and the ATO’s compliance focus for 2010/11“).

I have outlined below the key issues and areas for both trustees and professionals taken from these presentations:

1. Continued focus on auditors

Highlighted that the ATO expect to complete 1,100 planned activities across:

  • ‘high risk’ auditors (independence issues), auditors with few clients (2-5 funds), auditors with lots of clients (in particular where auditors are not lodging ACRs);
  • Auditors who are tax agents;
  • Auditors who struggle with independence threats

2. Trustee responsibilities

Key focus areas include:

  • acting on more than 3,000 ACRs that will be issued this year (up by 1,300 or 76% increase)
  • looking for repeat patterns of contraventions, including loans to members or financial assistance.  The ATO have 300 audits planned with 1,000 reviews, 1,200 mail cases and a follow-up program for loans relating to the 2008-09 financial year – on for this area alone!!
  • Breaches of in-house asset – the ATO expect significant follow-up activity for breaches of these rules in this financial year.

3. Lodgement

  • Only 72% of Funds lodged their 2009 SMSF Annual Return on time.
  • Began a pilot exercise in issuing 250 notices to SMSF trustees with pending default assessments, taxing the fund assets at 45% less non-concessional contributions!!  If these funds refuse to meet their statutory requirements, they will be made non-complying.

4. Illegal early access and illegal early release schemes

  • Work continues to be undertaken to combat illegal early release schemes with improvements to the fund registration process at establishment and for rollovers into SMSFs from APRA regulated funds.
  • In October 2010, the ATO will be introducing a member verification service that will enable APRA funds to check that the member requesting the rollover actually belongs to that fund.

5. Tax Issues

The key focus areas include:

  • Excess contributions tax notices – 40,000 notices issued in 2007-08 and 30,000 issued in 2008-09.  84% of breaches relate to concessional contribution cap which incurred tax at the highest marginal tax rate of 46.5% (but not ‘double taxation’ at 93% with a breach of the non-concessional cap).  The ATO is going to start scrutinising re-reporting of contributions between spouses where an excess determination has been issued.
  • Exempt pension income – this area continues to be of major concern to the ATO due to incorrect calculations of the tax exemption deduction.  It appears funds are not obtaining actuarial certificates in circumstances where they are required (unsegregated or proportional approach).
  • Tax return labels for deductions and credits – the Regulator appears to be tiring of misreported information through the SMSF Annual Return.  Items such as auditor fees, supervisory levy, investment expenses are regularly being incorrectly reported.  The ATO have made it clear that offences can apply for false and misleading statements.

The ATO as regulator appears to be making a conscious effort to enforcing action on non-compliant funds in an effort to remove those trustees who are dragging down a sector that Jeremy Cooper, Chair of the Super System Review said was as a whole in ‘good shape’.  The ATO appears ready to be applying the regulatory blowtorch…

Click here to read Stuart Forsyth’s speech.
Click here to read Neil Olesen’s speech.

(C) The SMSF Academy 2012
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