Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 29

ATO to increase surveillance of SMSFs

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.

 

1 Comments
Ian Kredulis
September 02, 2013

(Editor's note: this is an excellent comment despite the cryptic name). I write this for the benefit of all SMSF members who may read it. Ultimately it is you who are legally responsible for the prudent management of your SMSF, irrespective of the number ( and competence) of investment advisors, fund administrators, brokers, agents, accountants and other service providers you may use.

You have taken on a significant legal responsibility in deciding to operate your own SMSF which cannot be contracted out of nor outsourced to a service provider. You may have a legitimate claim against a particular provider in the event of action by the ATO, but that will be separate to you having to defend your actions in respect your behaviour and decisions as a trustee.

The governing rules of every SMSF are assumed, under the Superannuation Industry (Supervision) Act 1993, to contain several covenants (promises), of which the one that most SMSF trustees struggle with is the investment covenant: SIS Act section 52B(2)(f). It doesn't matter if it's not in your Trust Deed, a minute, or other policy document. The law assumes that you, as trustee, have made a legal promise under section 52B(2):

  (f)  to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the following:
(i)  the risk involved in making, holding and realising, and the likely return from, the fund's investments, having regard to its objectives and its expected cash flow requirements;
(ii)  the composition of the fund's investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;
(iii)  the liquidity of the fund's investments, having regard to its expected cash flow requirements;
(iv)  the ability of the fund to discharge its existing and prospective liabilities;

From a practical perspective SIS Regulation 4.09 mirrors the above wording for SMSFs, and is the regulation that requires SMSF auditors to sight, review and 'sign off' on the Investment Strategy document to give a SMSF a clean bill of heath (in respect of its investment strategy).

Firstly, please note that the law refers to 'trustee'. If you're a member of an SMSF you need to be aware of the above requirements. There is no concept of 'dominant trustee' and 'passive trustee'. You may be in a two person SMSF where your partner is the one making all the investment decisions. The law, as written, disregards this and assumes that you are aware of, and have an equal say, in the investment decisions made.

To paraphrase the requirements above, you, as trustee, need to ensure that you have a written Investment Strategy that has been crafted for your fund's particular circumstances; not one that was bought off the shelf or produced by someone else as a 'template' for you to edit and sign-off on. Further you need to consider four key investment issues: Risk, Return, Liquidity and Diversification. And this process needs to be a dynamic one, regularly reviewed and changed with the shifting personal circumstances of the fund's members.

When considering risk and return, you need to first determine what your SMSF's objectives are, or should be. Here's a hint: aim to meet the 'sole purpose test' found in SIS Act section 62(1) which in essence says that a super fund should exist to provide retirement or death benefits to its members. Not taxation benefits prior to retirement. Not to take speculative risks on single investment assets, nor to hold exotic or unusual assets that would otherwise not be held by public offer funds.

You, in choosing to have a SMSF, are in essence declaring that you will take control of providing for your own retirement. With great control comes great responsibility.

Note as well the reference to 'expected cash flow requirements' and being able to meet 'existing and prospective liabilities'. Does your Investment Strategy factor in the possibility that a significant portion of fund assets might need to be liquidated at relatively short notice? Pension obligations can be planned for months and years in advance. But what about an unexpected death (or permanent disablement) of a member? What about an acrimonious divorce where one member insists on rolling their benefit to another fund?

Finally to the vexed issue of diversification. Is your SMSF exposed to the expected performance of one, or a few, assets? What if this concentrated position doesn't pay off? Where does that leave your retirement, and that of your partner or fellow members? This is particularly relevant in light of Graham Hand's excellent piece on the spruiking of investment property to SMSF trustees under the Limited Recourse Borrowing Arrangement rules.

In summary, running a SMSF is no small undertaking. If you have gone down this path, then you have accepted the legal obligations that accompany such a move. Ignorance of the law is no excuse. Nor will the action (or inaction) of service providers provide protection from the application of the SIS Act and its Regulations to you. Forewarned is forearmed.

 

Leave a Comment:


RELATED ARTICLES

What exactly is the ATO’s role in SMSFs?

Does a declaration of trust satisfy SMSF separation of asset regulations?

How super members can avoid missing out on tax deductions

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 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.