ATO points to emerging risks for SMSFs

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Australian Taxation Office - ATO SMSF emerging risksThe ATO Assistant Commissioner with responsibility for SMSFs, Matt Bambrick, has highlighted emerging risks that concern the ATO in the SMSF sector.

The speech, Update from the ATO on recent compliance activity, areas of concern with SMSFs and the ATOs future priorities, was given to the CPA Learn from the Masters SMSF Conference and Expo 2014.

SMSF Overseas Seminars

The ATO is concerned about promotors advertising “questionable SMSF conferences in overseas destinations”. It appears these seminars may be of limited value to the SMSF as they include “minimal training related to SMSF activities”. However the promotors claim the that the full costs of the trip can be claimed as a tax deduction. The ATO warns that:

“Trustees contemplating attending such events should be aware of the potential to contravene the sole purpose test.”

SMSF & home loan unit trust arrangement

The ATO is also concerned by a new strategy identified, where a residential property is purchased by a non-geared unit trust and leased to members of the fund. Under such a structure the property is “effectively financed” by the SMSF. The ATO warns that the arrangement may not satisfy the sole purpose test, and may contravene the prohibition on 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 assets provisions.”

SMSF Dividend Washing

In the speech Bambrick noted that in March the ATO sent 2,000 “self-amendment letters” to SMSFs that may have been involved in a dividend washing arrangement.

Dividend washing is a strategy where twice the franking credits are received relative to the number of shares held, according to Bambrick this requires:

“a special market that allows the taxpayer, often an SMSF, to re-acquire shares with a dividend attached, after the ex-dividend date, allowing them to take advantage of the additional franking credits to offset their tax liability or receive a refund of the excess imputation credits.”

SMSFs Dividend Stripping

The ATO will be shortly issuing a Taxpayer Alert about a strategy the ATO has noticed, consisting of a private company distributing retained earnings with franking credits to a SMSF, so that the SMSF receives a refund of the credits. The SMSF sometimes only holds the shares for a short period of time. Bambrick says:

“We [the ATO] encourage trustees and their advisers to carefully consider any arrangements into which they enter and whether these follow tax and regulatory requirements.”

SMSF Lodgement Issues

In September the ATO removed 22,880 SMSFs with two or more overdue annual returns from the Super Fund Lookup register – however this would only prevent the funds from receiving rollovers from APRA funds or setting-up new employer contributions. Bambrick said that “to date, over 20 per cent of these SMSFs have now either lodged or wound-up”.

However the ATO has much more severe powers at its disposal to enforce the SMSF lodgement obligations – including making such funds non-complying. This seems to be a attempt to use more proportionate measures to encourage compliance, like the new powers to issue education directions.

In 2014/15, according to Bambrick, the ATO is focussing on SMSFs which have never lodged a return, and will be removing many of them from Super Fund Lookup. Such SMSFs that are found to be operating will be referred for further compliance action, funds with “no evidence of the fund operating” will find their registrations cancelled.

SMSF Auditors

Now that SMSF auditors are registered with ASIC, the ATO is relying on them more than in the past:

“The accuracy and independence of SMSF auditors has always been critical to our compliance monitoring but now we’ll be relying even more on these auditors to identify and rectify minor breaches.”

Of course, this also means more focus by the ATO on the quality of the work by SMSF auditors, with 1000 auditors to be contacted this year where the ATO has concerns “about some aspect of their behaviour”. This represents a significant portion of the ~7,500 SMSF auditors. Another 165 SMSF auditors, including “a small number of high-volume auditors”, will receive a review and audit by the ATO

The ATO is also focussed on:

  • Aggressive tax planning by SMSFs
  • More sophisticated illegal early release of superannuation – including “round-robin loans to purported unrelated entities”
  • Segregation of pension assets
  • Apportionment of fund expenses

The full text of the speech can be found on the ATOs website.

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