In a recent speech to the to the 2018 SMSF Association National Conference, the ATO’s Superannuation Deputy Commissioner, Mr James O’Halloran, noted the size and significance of the SMSF sector, consisting of “some 597,000 SMSFs having total assets worth $697 million, or 30% of the $2.3 trillion in total super assets.” The size of the sector and the high level of regulation applying to it mean that SMSFs are a major focus for the ATO.

Mr O’Halloran’s wide-ranging speech, The regulatory outlook for SMSFs, emphasized the significant tax and other compliance challenges facing SMSF trustees and members, and the ATO in policing compliance.

Refer to CCH Books’ Superannuation and SMSF titles for more guidance and insights.

Recent developments

Working with the industry, including the SMSF Association, the ATO has modified some of the reporting around the transition to the new superannuation rules from 1 July 2017:

• event-based reporting (EBR) for SMSF members’ transfer balance cap events is limited to SMSFs with members with total super account balances of $1 million or more
• the due date for lodging 2017 SMSF annual returns extended until 30 June 2018
• trustees now have until 30 June 2018 to lodge a return with an election for transitional CGT relief or amend a lodged 2016/17 return in order to include an election if necessary. CGT relief is not automatic and the election must be made in the annual return.

Practical compliance issues

Mr O’Halloran highlighted the following compliance issues, requiring action to be taken:

• SMSFs in the coming months should establish if their members are impacted by the new transfer balance cap. They must elect for transitional CGT relief in the CGT schedule in the fund’s 2017 SMSF annual return. The due date of that return is 30 June 2018
• SMSFs with members who chose the practical compliance approach to commutations before 1 July 2017 by requesting that any amount in excess of the $1.6 million transfer balance cap be commuted before 1 July must ensure relevant asset valuations are undertaken and precise amounts of those commutations are calculated and recorded in the fund’s 2017 financial statements before the due date of their SMSF annual return
• all SMSFs must ensure that assets in their fund are appropriately valued with relevant valuations supported by objective evidence and data
• for individuals who may have inadvertently exceeded the transfer balance cap, the fund should undertake up-to-date asset valuations to determine the amount of any excess and minimize the excess transfer balance tax liability that will otherwise accrue.

Compliance risks

SMSF trustees and members need to be aware of regulatory and income tax risks, including those from emerging planning arrangements, for example:

• breach of regulatory obligations by trustees, including illegal early release of funds, loans to members and taking part in tax planning arrangements such as dividend stripping or diverting personal services income to an SMSF
• using fund reserves in strategies designed to circumvent super and income tax legislation. The ATO will not review SMSF actions in relation to reserves before 1 July 2017 unless there is clear evidence of abuse
• using fund assets to provide residential accommodation to a member or relative may contravene the sole purpose test
• SMSF investments in Bitcoin or other cryptocurrencies pose challenges to requirements that fund assets be managed separately from the member’s personal and business assets, establishing clear legal ownership and appropriate valuations for accounting and tax purposes
• SMSFs and related-party property development ventures, arrangements where an individual or related entity grants a legal life interest over a commercial property to an SMSF, and arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable and non-taxable components of their fund balance upon refund of the excess.

Concerns about SMSF auditors

The ATO is visiting approximately 300 SMSF auditors in 2018, amid concerns about the appropriateness of processes and practices of some. High-risk areas include those who may be auditing funds where they have had a role or responsibility for preparing the accounts and financial statements, low-cost auditors and those who may be auditing a relative’s fund.

ATO audits in the last 18 months have revealed the following scenario: the auditor is generally a sole practitioner but often with some staff. The staff typically prepare the accounts or financial statements and either the auditor signs off on them directly, or a senior staff member does. Mr O’Halloran says this still creates a prima facie independence issue. In audit cases, the ATO has started looking at compliance with CPD requirements and is finding some gaps.

CCH iKnow has a useful summary of the Superannuation changes applying from 1 July 2017.

Also see information about SMSFs and SMSFs – taxation and tax return on CCH iKnow.