Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 110

What exactly is the ATO’s role in SMSFs?

In 1999 the regulation of SMSFs was moved from the Superannuation and Insurance Commission (subsequently APRA) to the Australian Taxation Office (ATO). At that time, it was suggested that the ATO acquired the role because SMSFs were seen to be just tax play vehicles, not serious retirement funding vehicles. So, in 2015 when SMSFs hold one-third of the $2 trillion or so in super, is it still correct to say that the ATO’s role in SMSFs is just revenue protection? Or does the ATO have a role in ensuring that SMSF members have a comfortable retirement?

Comparing ATO and APRA regulation

Our starting point has been to compare the way that the ATO regulates SMSFs with the way that APRA regulates the institutional super funds it is responsible for (retail, industry and corporate super funds for example) against five criteria.

First, we looked at the main rule which links the way that a super fund is managed with the tax concessions received on contributions, fund income and benefit taxes: that is, how to be a ‘complying superannuation fund’. The compliance test for SMSFs is different to that for the other type of super funds and, generally, it relates to ensuring that the assets of the SMSF are not misused, such as being a liquidity vehicle for a fund member who has an otherwise illiquid asset. What we also saw was that the chances of non-SMSFs falling foul of this rule are virtually zip.

Second, we looked at the ‘covenants’ in super fund trust deeds. Covenants are, in effect, standards of conduct by which the trustee must run the fund. Again, these differ between SMSFs and non-SMSFs and, importantly, the covenants applying to institutional funds are all directed at protecting the members of the fund from mismanagement by the trustee around various risks that members may be exposed to. On the other hand, the covenants by which a SMSF trustee must comply with relate again to protecting against misuse of the fund assets.

One important covenant for SMSFs is that at they have an ‘investment strategy’, which is referenced to things about investing such as having regard to asset/liability, liquidity and diversification. Interestingly, while the ATO will want to see the SMSF’s investment strategy that is about as far as they go. They do not comment on whether it is good or bad. They just want to see that one exists.

Third, we looked at any differences in the application of the ‘sole purpose test’ between the two types of super funds. It’s the principal regulatory tool for SMSFs and it comes from a 1967 High Court decision about whether a Western Sydney solicitor’s super fund, which was running a property development business, was in fact, a super fund (it wasn’t.) In any case, with two exceptions, all the cases on the sole purpose test have involved SMSFs. It’s not a relevant issue for non-SMSFs.

Fourth, we looked at the rules restricting how a super fund invests. Again, with two exceptions, these rules apply equally to both types of super fund, but what we see is that most of these restrictions are about related-party transactions, which is also not an issue for non-SMSFs.

Finally, we looked at the difference in the style of regulation between the ATO and APRA. This is very telling as the way the ATO regulates SMSFs is against breaches of black letter laws, which, necessarily, can only be done after the breach has occurred. On the other hand, APRA is a prudential principle-based regulator, which assesses the risks to members in the way that the super fund is being run and then offers guidance to the trustees about how to manage those risks. Of course, that is regulation in advance of a breach, besides being directed at protecting members’ interests.

SMSF regulation is simply to ensure qualification for tax concessions

Overall then, our preliminary view is that the ATO simply regulates SMSFs to ensure that they are used for the purposes for which they receive tax concessions. For example, all that is required of an ‘investment strategy’ is that it exists, with no opinion on whether 0% or 100% of anything is suitable.

The next stage for us is to compare SMSF regulation with equivalent type pension funds in the US, Canada and the UK, to see how they do it and why. Also, we will have a look at how some other tax preferred funding vehicles are regulated, such as venture capital funds.

So what? Why do we need to know how SMSFs are regulated? Well, they do hold around $600 billion in assets so it would seem sensible to understand how they are regulated and whether this is appropriate, just in case we can make some suggestions for improvement. For example, is it reasonable that there is no guidance given to the trustee of a super fund on how money should be invested?

 

Gordon Mackenzie is a Senior Lecturer in taxation and business law at the Australian School of Business, University of New South Wales.

 

  •   22 May 2015
  • 2
  •      
  •   

RELATED ARTICLES

What are wealth industry regulators thinking about?

Are you paying tax by not starting a super pension?

How to prevent excessive superannuation balances

banner

Most viewed in recent weeks

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

A speech from the Prime Minister on fixing housing

“Fellow Australians, I want to address our most pressing national issue: housing. For too long, governments have tiptoed around problems from escalating prices, but for the sake of our younger generations, that stops today.”        

Taxation

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

Exchange traded products

Multiple ways to win

Both active and passive investing can work, but active investment doesn’t in the way it is practised by many fund managers and passive investing doesn’t work in the way most end investors practise it. Here’s a better way.

Economy

The Future Fund may become a 'bad bank' for problem home loans

The Future Fund says it will not be paying defined benefit pensions until at least 2033 - raising as many questions as answers. This points to an increasingly uncertain future for Australia's sovereign wealth fund.

Investment strategies

Managed accounts and the future of portfolio construction

With $233 billion under management, managed accounts are evolving into diversified, transparent, and liquid investment frameworks. The rise of ETFs and private markets marks a shift in portfolio design and discipline. 

Property

Commercial property prospects are looking up

Commercial property is seeing the same supply issues as the residential market. Given the chronic undersupply and a recent pickup in demand, it bodes well for an upturn in commercial real estate prices.

Infrastructure

Private toll roads need a shake-up

Privatised toll roads in Australia help governments avoid upfront costs but often push financial risks onto taxpayers while creating monopolies and unfair toll burdens for commuters and businesses.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.