Each year, the ATO promotes a list of compliance areas that the regulator intends to target when reviewing SMSFs during the financial year. This is the hit list for the 2018/2019 year, although you can expect many of the areas to be focused on in the early parts of the 2019/2020 year as well.
In September 2018, James O’Halloran, ATO Deputy Commissioner, Superannuation, spoke at a conference and explained what the ATO would be focusing on in terms of SMSF compliance. In addition to addressing SMSF audits, Mr O’Halloran also outlined the ATO’s compliance focus, what I call the ATO’s SMSF hit list for the 2018/2019 financial year. (For more information on the ATO’s specific approach when a breach is discovered, see SuperGuide article SMSF trustees face big penalties: 2018/2019 guide).
The ATO’s 2018/2019 SMSF hit list is set out later in the article.
ATO’s approach to non-compliance is supportive, but forceful
In other recent speeches, other ATO representatives explain the compliance approach taken by the ATO. According to the ATO, its primary focus is to “support, inform and assist SMSF trustees and their advisers to manage their retirement savings in their fund, although certain circumstances require a stronger response from the regulator.
Stronger responses from the ATO can include the following actions:
- Written directions to undertake mandatory education
- Orders that compel trustees to rectify the breach within a set timeframe
- Application of administrative penalties
- Disqualification of trustees
- Notice of non-compliance, making the SMSF non-complying
For more information on the ATO penalties that may apply, see SuperGuide articles SMSF trustees face big penalties: 2018/2019 guide and SMSF compliance: Administrative penalties hit hard for misbehaving trustees.
ATO takes a constructive approach when engaging with SMSF trustees
The ATO’s compliance approach for the 2018/2019 year generally involves six main strategies:
- Focus on helping individuals, and supporting and assisting SMSF trustees who are willing to engage with the ATO.
- Focus more time on intensive compliance activities for the most serious instances of non-compliance, including trustees who are unwilling to engage with the ATO, or who deliberately and persistently don’t comply with the rules, or who seek to adopt aggressive income tax positions.
- More intensity and focus to activities that review and assess the independence and quality of SMSF audits.
- Identification of at-risk new SMSFs and SMSF trustees, contacting these SMSF trustees and where the ATO has concerns, taking appropriate action (for example, sometimes this will involve removing the SMSF from the system).
- Provision of more guidance material to make it easier for SMSF trustees to comply with super rules and tax obligations, and the July 2017 changes.
- Particular focus on SMSF behaviour as a result of July 2017 changes.
ATO’s 2018/2019 year SMSF hit list
In no particular order, the ATO’s 2018/2019 SMSF hit list is set out below:
- Total Superannuation Balance. With the introduction of a Total Superannuation Balance ($1.6 million) from 1 July 2017, the ATO is actively monitoring activity around the TSB (for more information about the TSB, see SuperGuide article Total Superannuation Balance: 7 reasons why your TSB matters).
- Transfer Balance Cap. With the introduction of a Transfer Balance Cap ($1.6 million) from 1 July 2017, and the requirement to report events (such as starting a pension, or commuting a pension) related to a fund member’s transfer balance account from July 2018 (TBAR), the ATO is actively monitoring activity around the Transfer Balance Cap. As at July 2018, the ATO had issued 2000 Excess Transfer Balance (ETB) determinations to SMSF members, although the ATO expects some of these to be amended. If the ETB determination stands however, then the excess amount must be commuted in full by the due date, and the commutation must be reported to the ATO within 10 business days after the end of the month when the commutation took place. For more information on the TBC and TBAR, see SuperGuide articles (for more information about the TSB, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap and Compliance alert! 85% of SMSFs exempt from quarterly event-based reporting and SMSFs: Transfer Balance Account Report requirements.
- Market-linked pensions. The ATO focus on these types of pensions relates to the implementation of the Transfer Balance Cap, and where an individual commutes a market-linked pension, and then starts a new market-linked pension.
- About 1,900 SMSFs reported reserves in their 2016/2017 SMSF returns, totalling $375 million. Of these 1900 SMSFs, 35% (690) had not previously reported reserves. The ATO says events that are likely to attract ATO’s attention include “any unexplained increase in new reserves, increases in the balances of existing reserves, or allocation of amounts from a reserve directly into the retirement phase”. The ATO warns that where SMSFs implement strategies using reserves, that are “designed to circumvent restrictions in the super and income tax legislation, thereby weakening the integrity of these measures, [the ATO] will consider the potential application of the sole-purpose test under section 62 of the [SIS ACT] and Part IVAQ of the Income Tax Assessment Act 1936”. The ATO reminds SMSF trustees that to ensure an allocation of reserves is not counted as a concessional contribution, it needs to be allocated in a fair and reasonable manner to all members of the SMSF and the amount must be less than 5% of the member’s total super interest in the SMSF.
- Multiple SMSFS. According to the ATO, around 13,600 SMSF trustees have more than one SMSF, and 35 trustees have more than 5 SMSFs. The use of multiple SMSFs to minimise tax is becoming an emerging issue with the introduction of the Transfer Balance Cap since July 2017. The ATO recognises that there are genuine reasons for multiple SMSFs, such as blended families, large families, business concerns and different investment strategies for different life stages. The ATO will be focused on individuals with multiple SMSFs using arrangements to circumvent the intention of the TBC. The ATO provides the following example: “if the individual repeatedly switches between accumulation and retirement phase in these funds to ensure that large gains and income are always incurred by assets in the retirement phase, achieving a greater effective tax exemption that would ordinarily be available”.
- SMSF registration. During the 2017/2018 year, around 26,000 new SMSF registrations were processed, but the ATO reviewed around 2,100 (9%) of these SMSFs, and cancelled the ABN of 29% (621) of the 2,100 under review, and withheld the details of 16% (336) of the 2,100 from Super Fund Look Up. If an SMSF is withheld, employers cannot pay super contributions to the fund, and super funds cannot rollover benefits to the SMSF. The ATO’s review focuses on the motivation for setting up an SMSF, the individual members’ financial history and business acumen, and the compliance history of advisers involved.
- SMSF auditors. The ATO reviewed instances where ATO data and intelligence indicate that an SMSF auditor also acted as tax agent for the SMSF, or auditors auditing their own SMSF. The ATO also gives special attention to low-cost auditors, and also high-volume auditors (previously, this category covered auditing firms that sign off on 1000 or more audits per year). The ATO has previously identified roughly 40 of these types of auditors. Note the ATO has not previously found any “issues of concern” with these types of auditors. The financial regulator, ASIC, has the power to impose conditions on the auditor, or even cancel the approved SMSF auditor’s registration.
- Non-lodgement of SMSF annual returns. As at 30 July 2018, 90% of 2016/2017 SMSF returns were lodged on time, which leaves 10% that failed to lodge on time. From 49,000 non-lodgers, as at 30 July 2018, more than 22,000 SMSFs have re-engaged with the ATO and lodged overdue SMSF returns, or, they have exited the system and wound up the SMSF.
- Trustee disqualification. For the 2017/2018 financial year, the ATO disqualified 257 trustees who were trustees of 169 SMSFs. In 70% (124 funds) of those disqualifications, illegal early release of super monies was the reason for disqualification. Sixteen SMSF trustees were disqualified due to dividend stripping (see bullet below), 5 SMSF trustees were disqualified for non-lodgement of SMSF returns (see bullet below), while 64 SMSF trustees were disqualified for unrectified contraventions.
- Inappropriate tax-planning arrangements. The introduction of the Transfer Balance Cap (refer earlier), has meant renewed ATO focus on such arrangements. The ATO is identifying emerging schemes which target Australians planning for their retirement.
- Dividend stripping arrangements. According to the ATO, such an arrangement “involves structures designed to channel franked dividends from a private company with accumulated profits to a fund instead of to the company’s original shareholders. As a result, the original shareholders avoid tax on the dividends and they, or individuals associated with them, benefit as members of the SMSF from franking credit refunds to the SMSF.” The ATO considers that this type of arrangement creates tax-free company income, and affects the availability of concessional tax treatment when a fund is in accumulation phase. In relation to a SMSF in retirement phase, dividend stripping affects a fund’s ability to report exempt current pension income. For more information, see ATO Taxpayer alert 2015/1: Dividend stripping arrangements.
- High-balance SMSFs. The ATO is implementing a deliberate strategy to review the highest balance funds, by reviewing the largest 100 ranked SMSFs based on total assets reported during the 2016/2017 year. The ATO will be examining non-arm’s length income, dividend stripping (see earlier bullet) and structured arrangements designed to avoid tax.
For more information on SMSF compliance
- SMSF compliance for super beginners
- SMSFs: The 12 most common mistakes made by trustees
- SMSF basics: Trish’s 10 commandments of DIY super
- SMSFs: Driving your super C-A-R-T obligations
- SMSF compliance: Is your fund due for a super service?
- SMSF advice: Is your accountant still allowed to help your fund?
- SMSF providers: What should I look for when setting up my DIY super fund?
- SMSF compliance: Administrative penalties hit hard for misbehaving trustees
- SMSF trustees face big penalties: 2018/2019 guide