I recently read an article that claimed the Australian Taxation Office (ATO) was not keeping an eye on the SMSF space. Let me assure you, that statement is not correct. An increase in SMSF numbers has made them an easy attack, and the recently released ATO Compliance Program 2013/14 will endeavour to keep critics of SMSFs silent.
The following aims not to argue that point but to look at what the ATO has in store for SMSFs in 2013/14 and the implications for trustees. It will examine one of the main areas that the ATO’s compliance activity will focus on this year – related party transactions.
ATO Compliance Program 2013/14
The ATO has stated that it will continue to focus on SMSFs that misuse the concessional tax environment, deliberately or unintentionally.
The ATO will monitor the registrations of SMSFs using information on the Australian Business Register (ABR). If a fund is in its first year of operation and the ATO considers it highly likely that it will not operate correctly, its lodgement concession will be removed. This means that the fund must lodge by 31 October, and the ATO will follow up to ensure it lodges by that date. The ATO has stated that it will not issue a notice of compliance until after the fund has lodged its first annual return and it is satisfied that the fund is doing the correct thing.
The ATO will focus on:
- whether the fund has been established as a genuine superannuation fund
- lodgement obligations
- use of prohibited loans
- related party transactions
- funds with a history of non-compliance
- incorrect reporting of exempt current pension income, tax losses and non-arm’s length transactions.
The ATO also stated that it will provide ongoing support to approved auditors whilst also monitoring their competence, including via contravention reports. It will continue to refer any concerns to ASIC, with whom it works closely on the registration regime for auditors of SMSFs.
Last year, the ATO reviewed the regulatory compliance of over 9,000 SMSFs, raising $16.4 million in tax liabilities. The audits resulted in 132 SMSFs being made non-compliant due to serious breaches of their obligations. The ATO Program highlighted that most trustees met their obligations with reported breaches running at less than 2% of all such funds.
Should we be worried?
The answer is NO. With the largest number of funds in the industry and over one-third of superannuation assets, even the Cooper Review generally confirmed that the SMSF sector is largely successful and is a well-functioning part of Australia’s super system. The Cooper Review stated that on the face of it, the SMSF sector performs at least as well as the large APRA fund sector and that significant changes were not required.
Impact for SMSF trustees
It is well known that the main reason for establishing an SMSF for both members and trustees is to gain control and flexibility over investments. Individual members become, as trustees, their own fund manager. Ultimately, they are responsible for both the investment decision-making and the administration of the fund. An SMSF provides its members with many benefits such as the opportunity to actively decide upon the fund’s investment strategy and to select appropriate asset classes.
There are also rules that trustees need to consider when devising an investment strategy, including the acquisition of assets. This will be one of the main focus areas for the ATO’s compliance activity this year.
The trustees of SMSFs in general are prohibited from acquiring assets from related parties of the SMSF, including assets contributed in-specie.
However, there are several exceptions to the rule, including where:
- the asset is a listed security (for example, shares, units or bonds listed on an approved stock exchange) and the asset is acquired at market value
- the asset is business real property and acquired at market value
- the asset is an in-house asset, but the level of your fund's in-house assets does not exceed the threshold for SMSFs of a maximum 5% of total fund assets, or is an asset specifically excluded from being an in-house asset.
A related party of a fund includes all members of a fund and their associates, as well as all standard employer-sponsors of a fund and their associates.
An associate of a member of an SMSF includes the following:
- every other member of a fund
- the relatives of each member
- the business partners of each member
- any spouse or child of those business partners, any company a member (or their associates) controls or influences and any trust the member (or their associates) controls.
Trustees are also prohibited from lending money or providing financial assistance from the SMSF to a member or a member’s relative. The use of an SMSF asset by a member or a member’s relative for no cost or as a guarantee to secure a personal loan, for example, is not allowed and would breach the investment restriction.
In keeping with the ATO Compliance Program 2013/14, it is recommenced that specific advice be sought before an SMSF invests in any type of investment as there are a number of rules that need to be considered.
Andrew Bloore is Chief Executive Officer of SuperIQ, a leading SMSF administrator.
This information is intended as a guide only and is based on proposed policy announcements as at July 2013. We believe the information contained in this update has been obtained from reliable sources but we do not accept responsibility for any errors, omission or inaccuracies.