The Commissioner of Taxation each year launches his compliance program that outlines the areas which are of most concern to them and will ultimately target to ensure compliance with the law. The 2009-10 compliance program launched in August 2009, identified some key issues which the ATO will focus on including loans, in-house assets, borrowings and non-arms length transactions. It is anticipated that they will contact more than 3,000 trustees to determine whether their SMSF is compliant with respect to these issues.
In addition to the above issues, the ATO is also looking at accuracy and timing issues of lodgements, residency issues, the approved auditor role, illegal early release schemes (promoters), and ensuring new SMSFs meet all their lodgement and regulatory responsibilities.
Interesting from the above areas, the regulator will be focusing on some of the professionals or providers to SMSF trustees. The ‘audit the auditor’ program has been running for a few years now with somewhere between 800 – 1,000 auditors each year being reviewed regarding their quality of audit files, independence and ability to conduct appropriately a financial and compliance audit. Unfortunately over time, there have been some disappointing findings from the regulators viewpoint with the quality of audits, however with changes to professional body requirements, we are hopefully seeing the bar set higher to ensure a greater level of quality in the audit process.
The other interesting one here is the focus on accuracy and timing of lodgements. Whilst completing returns by the due date is nothing new, an emerging issue appears to be the accuracy of information provided to the ATO. This appears to be an issue for the accounting industry (tax agents, who complete 98% of all returns) and those providing administrative and compliance services to SMSFs. I understand the ATO will be investigating items such as calculations of exempt pension income and other levels of tax deductions within funds.
I’ve outlined below some comments on where I see the ATO investigating further in their compliance program:
- Loans – the issue of lending money has been a long standing problem and somewhat of a legacy issue from the excluded fund days (pre 01/07/1999). Issues around lending to members or family members and loans to prop up businesses (in-house assets issues) have all been key concerns for the ATO. The ability for fund trustees to ‘dip into the super fund bank account’ when times are tough is not a viable excuse!!! The ATO is and will continue to throw the book at trustees who access their fund before they are allowed to, whether it be through making the fund non-complying (taxing fund assets @ 45%), disqualifying trustees, imprisonment, or all of the above.
- In-house assets – with the transitional provisions having concluded at 30 June 2009 for Golden Unit Trusts (pre 11/08/99 trusts), you would envisage that the ATO will be taking a close look at these arrangements to ensure compliance. This area is not understood very well across the industry and would be a constant source of frustration for the regulator with compliance audits, in particular where people easily confuse certain related party transactions with in-house issues.
- Borrowings – this is a potential ‘sleeper’, with the key borrowing change over the last couple of years being the re-birth of gearing in super using an SMSF instalment warrant. Whilst the borrowing prohibition is more broad than the instalment warrant issue, you would expect this to attract a fair amount of detail to ensure compliance with the s.67(4A) exception. With the final release of SMSFR2009/2 mid-year, you would expect various issues from this ruling to be targets in the compliance program.
- Non-arms length transactions – this issue has wide spread application across SMSFs that can lead to various acts of non-compliance. Whether it be transferring assets into an SMSF at a lower than realisable value or the lack commerciality in a related party lease agreement, the notion of arms-length plays an important role in the integrity of SMSF governance. Typically when looking at situations of arms-length dealings considerations of other SIS Act or Regulation requirements typically follow, such as the sole purpose test.
- Residency – in a world that is more open to working and living abroad, the ATO continues to look at those trustees who cannot demonstrate that the central management and control resides in Australia. Whilst there are matters such as temporary absence to consider for people being seconded overseas for a couple of years, the regulator is looking to deny tax concessions as an Australian Superannuation Fund where it appears the trustees are overseas on a more permanent basis. There are means to deal with this matter using an Enduring Powers of Attorney, but in many instances this type of fund restructure has not occurred.
What can we learn from this ATO compliance approach? For those funds who have compliance issues, the view of the Tax Office is not to throw the book at trustees where issues are identified and worked to rectify. The education component of the ATO’s role is and will continue to play a vital role through the continued growth f the SMSF sector. However, they will have little regard for those who have little regard for superannuation and tax law, so you do this at your own peril…