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A few years ago the Australian Taxation Office (ATO) put together a list of the most common errors that self-managed superannuation fund (SMSF) trustees make when compiling their annual returns.
And in a speech last year, ATO assistant commissioner Justin Micale said that a large percentage of newly established SMSFs had failed to lodge their first ever annual return.
“Currently 17% of the 28,000 funds registered in 2022 have failed to lodge their first return,” he told delegates at the CAANZ National SMSF and Financial Advice Conference in November 2023.
Given that failing to lodge an annual return in the first place is probably the biggest mistake that SMSF trustees could make with their annual return, let’s examine five other common mistakes and how to avoid them.
1. Not valuing the SMSF’s assets at market value
Providing the correct market value of your assets is an important responsibility of an SMSF trustee. Assets need to be valued as at 30 June each year. If you provide incorrect valuation information you may jeopardise your SMSF’s complying fund status and could incur penalties.
It’s reasonably easy to value listed market assets (that is, their closing value on 30 June each year). Providing values of non-listed assets such as real property, collectibles, private companies and private unit trusts can be more difficult.
Real property valuations need to be based on objective and supportable data and made by a competent person. Things to consider when doing so include the value of similar properties, the amount paid in an arm’s length market transaction, independent appraisals, whether or not the property has had improvements since it was last valued for the previous year, and net income yields (for commercial properties).
The ATO says to consider getting an independent valuation (from a qualified valuer) if an unlisted asset represents a significant proportion of the fund’s value or the nature of the asset indicates that the valuation is likely to be complex. Independent valuations are required for collectibles.
As a reminder, collectibles refer to:
- Artwork
- Jewellery
- Antiques
- Artefacts
- Coins, medallions or bank notes
- Postage stamps or first-day covers
- Rare folios, manuscripts or books
- Memorabilia
- Wine or spirits
- Motor vehicles and motorcycles
- Recreational boats
- Memberships of sporting or social clubs.
2. Lodging a return without auditor details
All SMSFs are required to lodge an auditor’s report with their annual return. This needs to be done by a registered independent auditor (you can check whether an auditor is registered here) and the auditor needs to notify both the trustees and the ATO of any contraventions by the SMSF.
The trustees need to appoint the auditor at least 45 days before the annual return is due so the auditor can complete the audit on time. Trustees also need to supply the auditor with any information they request concerning the fund.
If an SMSF fails to lodge an auditor’s details with the ATO the SMSF return will be suspended and the fund classified as non-complying until the auditor’s report is filed.
Don’t forget it’s illegal to audit your own SMSF or an SMSF of a relative no matter who you are.
3. Bank account not unique to the SMSF
One of the first things that SMSF trustees must do when they set up their fund is open an account in the name of the fund which is separate to their individual or company bank accounts. The account will be in the name of the superannuation fund and used exclusively for the fund’s transactions.
The SMSF bank account is there to accept contributions, rollovers and income from investments and to generally manage investments for the fund.
“If your SMSF does not have a unique bank account, then your member’s retirement benefits may not be protected,” the ATO says.
4. Trying to lodge with zero assets
This might be something that many new trustees are unaware of. You may not need to lodge a tax return for your SMSF if it has zero assets. An SMSF is a trust and to be a valid trust it must have an asset otherwise it does not exist at law. If a fund has just been set up and is yet to receive contributions or rollovers from members, then it can apply to the ATO to flag the SMSF as ‘return not necessary’ (RNN).
In that case the fund must confirm (in writing) to the ATO that it has no assets and did not receive contributions or rollovers in the first financial year and that it will be lodging future returns. It also needs to provide documentary evidence of the date the SMSF first held assets and commenced operating (for example a bank statement).
As the lodging date for annual returns is generally months into the following financial year, even if a new SMSF had a zero balance at the end of the financial year, it is likely it will have received contributions before lodging date and it is evidence of those contributions or rollovers that the ATO is seeking.
Trustees written requests must include:
- The SMSF’s name, TFN or ABN
- Confirmation that it meets all eligibility conditions
- Documentary evidence of the date assets were first placed into the fund.
Tax agents can use online lodging services.
5. Providing an incorrect electronic service address (ESA)
If an SMSF is to receive contributions from external employers (that is, those other than related party employers) it needs to be able to receive SuperStream data electronically. SuperStream is the national data standard through which employers must pay super contributions into an employee’s super fund.
SMSFs are not exempt from this data standard, which was introduced in 2015 as part of a series of reforms to standardise the delivery of money and data.
Any fund receiving contributions via SuperStream needs an electronic service address or an ESA. An ESA is a series of alphanumeric characters with a combination of upper and lowercase characters and is case sensitive. You can get an ESA from a SuperStream message solution provider, listed in the table below, or through your SMSF intermediary, such as an SMSF administrator, tax agent or accountant.Â
SMSF messaging providers
Source: ATO
The bottom line
Preparing an SMSF annual return is serious business and something you need to get right if you don’t want your fund to become non-complying. Get it wrong and you may be forced to pay tax at 45% on the total value of the fund, excluding non-tax-deductible contributions.Â
