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ATO perspective: ‘only’ 2,184 SMSFs have assets over $10 million

Both Chris Jordan, Commissioner of Taxation at the Australian Tax Office (ATO), and Greg Tanzer, Commissioner at the Australian Securities & Investments Commission (ASIC), gave an update on compliance and regulatory issues at the SMSF Association National Conference in Adelaide this week.

Jordan’s dominant message was that the tax system will be too complicated if it tries to control a few outliers. He told the conference, “Don’t design the system for the last worst person. You should make it easier for the majority.”

For SMSFs, he put the complaints about high value SMSFs into perspective. In 2015, 2,184 SMSFs had balances over $10 million, but they include up to four members in each fund. Only six funds had balances over $100 million. The ATO has looked closely at each and they are “accidents of history”, often with balances accumulated over 30 years with one or two investments that had done extremely well. There are an additional 994 APRA fund members with over $10 million.

But there are over half a million SMSFs. Do you design a system of regulation for the 99.5% with less than $10 million, or make it complex by focussing on the extremes? With the current contribution limits of $30,000 (or $35,000) concessional or $540,000 non-concessional (using the bring-forward rule), it is difficult to build very large balances now.

Notwithstanding, the ATO does look at out-of-pattern numbers, such as a large increase in income or assets in a particular year. These funds may be studied more closely. The ATO had a particular problem with one fund where the shares were revalued from zero to a large number as soon as the member reached the exempt income age. He said, “Was the investor suddenly striking gold? What were the real numbers?” They also had issues where a company with large franking credits was moved into superannuation giving the member a massive refund of franking credits.

In addressing this balance between over-regulation and compliance, Commissioner Jordan explained the priority of the ATO is to improve confidence and trust in the tax system and “contributing to economic and social wellbeing by fostering willing participation in tax system.”

People are more likely to comply:

  1. the easier it is to understand the tax rules, and
  2. the more confidence they have in the integrity in the tax system.

Taxpayers are confused by complexity. “If A to C is enough, why do we require everything from A to Z?” The aim is to make guidance specific, adopt better early engagement and try not to take people to court and write lengthy letters.

For SMSFs, his particular focus is on related entity rules, and that the assets of the super fund are not for the trustees to use in any way they wish. For example, some people with gambling habits had written cheques from their funds to cover their habits. The ATO also wants Limited Recourse Borrowing Arrangements done properly, and anyone with a problem should contact the ATO rather than waiting to be caught. He wants an “open architecture in communications”.

He is also concerned that some SMSF auditors advertise a $200 cost for an automated online audit. Is it adding any real value? What do they really do for so little, where are they, and what’s it worth? The vast majority of taxpayers and industry professionals want to do the right thing, and the ATO wants to balance the cost of compliance versus oversight. Industry must help sort it out.

Greg Tanzer, ASIC Commissioner, explained how the regulators work closely together, with much better cooperation and communication recently. There are 6,700 registered SMSF auditors, but to be eligible, they need to pass a range of tests including at least 300 hours’ experience of auditing under supervision. This is not basic accounting but verifiable SMSF work. ASIC cancelled about 400 registrations last year for auditors failing to complete the required examinations. SMSF auditor problems include a lack of arms’ length on some transactions and poor quality documentation.

Tanzer emphasised the changes coming to accountants working with SMSFs. Until 30 June 2016, accountants can provide advice on establishing and operating an SMSF under an exemption from licensing requirements. This exemption has now been removed (and accountants always needed an AFSL to provide investment advice). There is an opportunity to apply for a limited licence by 30 June 2016 which includes the relaxation of some education requirements. However, accountants who want to continue to work with SMSFs must apply for a licence by 1 March 2016. It’s a serious application process and it will take a while for ASIC to review. He warned, “If you don’t have a licence after 30 June, you will be acting illegally.”

Accountants can be authorised under another AFSL, or apply for a limited or full licence, or change the business model to only do some bookkeeping. But accountants will no longer be able to advise on establishing or operating SMSFs unless licenced.

In summary, Tanzer added, “SMSFs are a marvellous competitive foil for retail and industry funds.” ASIC strongly supports the choice offered by SMSFs, but trustees need to realise that having their own fund is a weighty responsibility.

 

Graham Hand attended the SMSF Association National Conference courtesy of the Association. These comments are general interpretations and do not address any personal circumstances.

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