ATO outlines Self Managed Super compliance issues for 2014

Assistant Commissioner Matt Bambrick highlighted various areas of concern in the self-managed superannuation fund (SMSF) sector – from dividend washing and dividend stripping to overseas seminars and illegal early release – in his keynote address to a CPA SMSF conference.

As part of the ongoing SMSF compliance program, SMSFs will be divided into the three categories, as outlined below:

High-risk SMSFs – These funds will face a comprehensive audit of their tax and regulatory affairs. If high-risk funds deliberately choose not to comply with tax and regulatory obligations, the Tax Office will use the “full force of the law” where necessary. Where these SMSFs breach regulatory provisions under the new penalty regime, penalties apply of up to $10,200 per trustee – this means $20,400 for a two-person fund with individual trustees. Where a fund has a single corporate trustee, that is a penalty of up to $10,200 with directors being jointly and severally liable.

Medium-risk SMSFs – These funds will receive a phone call, generally within six to eight weeks of the auditor contravention report lodgement. The Tax Office will discuss the contravention and any other relevant matters, but on this initial occasion it will be willing to give the fund an opportunity to self-address identified issues with no penalties applied. However, if trustees fail to engage with the Tax Office and fail to self-address the issues raised or if further compliance issues arise, the Tax Office will likely consider these funds for audit and may possibly impose penalties.

Low-risk SMSFs – These funds will receive a tailored advice letter reminding trustees of their obligations and encouraging compliance in the future. The issues reported in their auditor contravention report will be closed with no penalties applied. However, if trustees fail to rectify all issues in full or if further compliance risks arise, these funds may be considered for compliance action.

High-risk and medium-risk SMSFs would be engaging in the following areas of concern identified by the Tax Office:

1) Dividend washing
Bambrick said that in March this year, the Tax Office sent self-amendment letters to around 2,000 SMSFs identified as potentially having implemented a dividend washing arrangement.

2) Overseas seminars
SMSF trustees considering attending “questionable SMSF conferences in overseas destinations” citing trustees can claim a deduction for the full cost of the travel, accommodation and meals component incurred when attending these seminars or workshops should be aware of the potential to contravene the sole purpose test.

3) Home loan unit trusts
The Tax Office has identified a potential home loan unit trust arrangement which involves the purchase of a residential property by a non-geared trust whereby units are purchased by the SMSF, related family trust and SMSF members.

Again, trustees should be aware of the potential to contravene the sole purpose test and/or of providing financial assistance to a member. If there is a form of “gearing” or investments in other entities involved within the trust, then the SMSF may also be in breach of the in-house asset provisions.

4) Dividend stripping
The Tax Office has noticed a retirement planning arrangement that involves a private company with retained earnings distributed by way of a franked distribution to an SMSF in circumstances where the SMSF is entitled to a refund in relation to the franking credits attached to the distribution.

This means ultimately earnings of the company are tax-free in circumstances where the SMSF holds the shares for a short period of time at no risk to realise the cash and franking credits in the most tax effective manner within an income year.

5) Illegal early release
The Tax Office is focusing on this issue in the establishment phase of SMSFs, that is with funds that are specifically set up to illegally access super benefits early, but also beyond that. Traditional illegal early release schemes and sophisticated schemes – such as round robin loans to purported unrelated entities – are under scrutiny. Best case scenario, offending funds are removed from the Super Fund Lookup but worst case scenario, the Tax Office will pursue further compliance action and impose penalties.

6) Lodgement
The pressure is on trustees of SMSFs with two or more lodgement obligations overdue, who will have their regulation details removed from the Super Fund Lookup until their lodgements are brought up-to-date, or in the case of non-operating funds, wound up. Affected funds will not be able to receive rollovers or establish new contribution arrangements until they address their lodgement obligations.

This year, the Tax Office is also focusing on SMSFs that have never lodged – it will also remove their details from the Super Fund Lookup – and will consider using its new administrative penalties to fine trustees directly for not preparing accounts in serious cases.

7) Exempt current pension income
The Tax Office will continue to monitor the compliance of SMSFs paying pensions to ensure they are claiming the correct amount of exempt current pension income. The key issues that can affect a fund’s claim to exempt current pension income include missing the minimum pension payment, segregation of pension assets and apportionment of expenses.

Top 10 Self Managed Super Fund compliance mistakes

The Tax Office has published a list of the top 10 compliance mistakes that SMSF trustees make when running their funds. The list is based on the type of contraventions reported by approved SMSF auditors between 2005 (when contravention reporting started) and up to June 30, 2012.

The top 10 contravention types (although admittedly one of them is “other”) in percentage terms are as follows:

An interesting observation is that of the top 10, three types of contravention represent more than two-thirds of the proportion of asset values (67.8%) involved in the most frequent contraventions. These are:

  • in-house assets
  • separation of assets
  • loans to members/financial assistance.

When looking at the number of contraventions, a little under two-thirds (64%) involve four of the top 10. These are:

  • loans to members/financial assistance
  • in-house assets
  • administrative-type contraventions
  • separation of assets.

The Tax Office has the following options when dealing with an SMSF contravention issue:

  • making an SMSF non-complying for taxation purposes
  • applying to a court for civil penalties to be imposed — a person may also face criminal penalties for more serious breaches of the law
  • accepting an enforceable undertaking in relation to a contravention, and
  • disqualifying a trustee of an SMSF.

As well, the Tax Office can issue the following:

  • rectification and education directions for contraventions, and
  • an administrative penalty regime for SMSF trustees for certain contraventions.

A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Tax Office with evidence of the person’s compliance with the direction.

An education direction will require a person to undertake a specified course of education within a specified time frame and also provide the Tax Office with evidence of completion of the course.

Where an administrative penalty is imposed it must be paid personally by the trustee or the director of the trustee company and cannot be paid or reimbursed by the SMSF. A table of some of the provisions that will attract the administrative penalty follows:

SMSF Penalties