SMSF annual tax return lodgement deadline 15 May (for tax agent’s clients) is fast approaching and trustees will be faced with their annual independent SMSF audit.
No trustee wants to incur hefty penalties or be disqualified as a trustee or see their fund losing its tax concessions by being made non-compliant by the ATO.
The good news is that the ATO has since 30th May 2016 opened an avenue for the trustees to directly engage with them by introducing an “Early and voluntary disclosure service”. The ATO is encouraging all trustees that have unrectified contraventions of the SIS Act to fill in the SMSF regulatory contravention disclosure form including a proposal for fixing the breaches. The auditor of the fund is still required to lodge an Auditor Contravention Report (ACR); however the ATO will be less likely commence an audit of the fund but instead be engaging with the trustees to assist with the rectification of the matters.
Below is a discussion on some of the common mistakes for SMSF trustee to avoid based on our experience and SMSF Auditor Contraventions statistics published by ATO.
Loans to members/financial assistance
Ensure that your Superfund bank accounts are clearly identified with Superfund name as a designation after the name of trustees. This is to avoid common mistakes where personal bills have been paid from the Superfund account in error or funds transferred to related parties from the superfund bank account in error. Even when these matters are quickly rectified by returning the monies to the superannuation bank account the auditor may still be required to lodge an ACR. As long as these mistakes are quickly rectified and are not repeated the ATO is unlikely to take serious action.
If the trustee finds itself in a position of being unable to immediately pay back the funds a rectification plan should be developed as soon as possible in consultation with the adviser and a voluntary disclosure form submitted to the ATO.
In-house assets
Keep your investments in in-house assets under 5% of total fund assets at all times to avoid this commonly occurring breach of SIS Act. The complication normally arises from the fact that some investments may be deemed to be in-house assets at a later date and also decreasing market values of the portfolio may contribute to the breach arising. When this occurs, action should immediately be taken to rectify the matter.
Separation of assets
It is in trustees interest to organise for members’ personal assets to be clearly separate from Superfund assets. For example shares owned by the superfund should have a designation “ATF xxx Superannuation Fund” after the trustee names to avoid returns from superfund investments being mixed up with the returns from personal assets. Having a corporate trustee is also a helpful strategy to assist in compliance with separation of assets rules.
More complicated instances are where assets are partially owned by superfund with related parties and income and costs are split. Care should be taken to ensure that only fund income and expenses from these investments are recorded in the fund and paid to and from the Superfund bank account.
Administrative-type contraventions
The most common ones that we as auditors come across are:
-Not keeping copies of the audited financial statements and signed minutes of meetings and trustee declarations. Trustees tend to rely on accountants to look after their document retention responsibilities; however the SIS Act states that it is the trustee’s responsibility to keep these documents for up to 10 years.
-Late lodgement, not providing documents timely. In 2016/2017 year the ATO will be targeting funds with multiple tax returns outstanding, so get these returns lodged and if you have any outstanding SIS Act contraventions, use the voluntarily disclose service to report these to the ATO to avoid the harsh consequences.
Below are some key focus areas for 2016/2017 where the ATO has provided guidance to assist SMSF trustees to avoid non-compliance
Funds with Limited Recourse Borrowing Arrangements (LRBA)
Is your LRBA structured in accordance with the ‘safe –harbour” terms from ATO Practical Compliance Guide (PCG 2016/5)? It is worth noting that this guide is only applicable for LRBA’s where the acquired asset is real estate or listed shares or securities. You have until 31 January 2017 to ensure compliance and either pay out the loan or update the terms to avoid your income from these investments to be considered Non-Arm’s Length income and taxed at the top marginal rate.
For detailed guidance see the below link:
https://www.ato.gov.au/law/view/document?DocID=COG/PCG20165/NAT/ATO/00001&PiT=99991231235958
The Super Scheme Smart
In August 2016 the ATO launched the Super Scheme Smart initiative to educate the SMSF industry about the potential pitfalls of retirement-planning schemes. ATO is currently warning the SMSF trustees to avoid the following schemes:
-Dividend stripping - where the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose being to strip profits from the company in a tax-free form
-non-arm’s length limited recourse borrowing arrangements – when an SMSF trustee undertakes limited recourse borrowing arrangements (LRBAs) established or maintained on terms that are not consistent with an arm’s-length dealing (as discussed above)
-Personal services income – where an individual (commonly with an SMSF in pension phase) diverts income earned from personal services to the SMSF where it is concessional taxed or treated as exempt from tax.
See “The Super Scheme Smart” at the ATO website for further details,
https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/Super-Scheme-Smart--Individuals/.
Changes for self-managed super funds commencing on 1 July 2017
The ATO has published the overview of the changes to the superannuation system commencing on 1 July 2017, however more detailed information and guidance will be published progressively. The ATO has stated that it will focus on helping the SMSF trustees understand how the changes will impact their funds and assisting them to comply with the new requirements. So watch out for this space.
You can find the full text of the overview of the super changes at the ATO website:
https://www.ato.gov.au/Super/Self-managed-super-funds/Super-changes-for-self-managed-super-funds/
Get your Superfund documents in early to ensure that there is sufficient time for the audit to be completed. If you have any questions our audit team at CMS Private Advisory are here to assist.
Further reading:
1) https://www.ato.gov.au/Super/Self-managed-super-funds/Administering-and-reporting/How-we-help-and-regulate-SMSFs/How-we-deal-with-non-compliance/
