Every year, the ATO focuses on a number of compliance areas that it intends to check when reviewing SMSFs during the year.
In July 2014, Matthew Bambrick, Assistant Commissioner, Self-Managed Superannuation Funds Segment, spoke at a conference and explained what the ATO would be focusing on in terms of SMSF compliance. As well as raising concerns about the quality of the compulsory SMSF licensed audits of SMSF annual return, Bambrick also outlined the ATO’s SMSF focus for the current financial year.
The most noteworthy of the ATO’s SMSF compliance areas is set out below.
1. Exempt current pension income
The ATO will be ensuring SMSF compliance with income tax obligations relating to exempt current pension income (ECPI). Bambrick points out that if the SMSF fails to meet the minimum pension payment requirements in an income year, then the pension account may be deemed not to be in pension phase, subject to some exceptions where the ATO gives discretion.
Bambrick also points out that pension assets must be separated from accumulation assets. This ensures the right amount of exempt current pension income is claimed. In addition, the appropriate apportionment of expenses must occur to ensure expenses related to exempt income, the latter comprising the earnings on pension assets, are not claimed as tax deductions.
2. Timeous lodgement of SMSF annual returns
In September 2013, almost 23,000 SMSFs with two more annual returns overdue had their regulation details removed from the Super Fund Lookup Register (SFLU). As a result, more than 20% of those 23,000 or so SMSFs have now lodged both sets of returns, or have been wound up.
Bambrick warns that this process has been repeated again during September 2014. The implications of such ATO action mean that the non-complying SMSFs will be unable to receive rollovers or establish new contribution arrangements until these lodgement issues are resolved.
Although the majority of SMSFs lodge annual returns on time, some lodge late or not at all. The ATO is penalising SMSFs that have never lodged returns, by removing those funds from the SFLU. Having said that, if the fund has been operating, it will receive compliance action for non-lodgement. Where there is no proof of operation, the ATO will cancel the fund’s registration.
The ATO will also consider using the new administrative penalties to fine trustees directly in serious cases. This power should not be underestimated as trustees may have few personal assets other than probably the family home.
3. Dividend washing
According to Bambrick, dividend washing is a “share trading strategy that enables a taxpayer to access double the franking credits attached to fully franked dividends even though the taxpayer effectively holds only one parcel of shares”. The way that trustees use it is to purchase shares in a special market that enables them to re-purchase shares with the dividend attached after ex-dividend date, delivering a double lot of dividends and franking credits.
In March 2014, the ATO sent letters to about 2000 SMSFs querying this strategy. Of those 2000 SMSFs, 38% were in pension phase.
4. Dividend Stripping
Bambrick flags that the ATO requires SMSF trustees to consider carefully dividend stripping strategies they may undertake. He says, “A retirement planning arrangement we’re seeing also 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 franking credits attached to the distribution.” Bambrick highlights that the issue is that this arrangement creates tax-free company income.
5. Home loan unit trusts and residential property
The ATO is concerned about poor advice that has led to a currently popular arrangement in terms of which a non-geared home loan unit trust purchases a residential property, and units in the trust are purchases by the SMSF, related family trust and SMSF members. Although the property is effectively financed by the SMS, the property is occupied and rented by the member. Providing financial assistance to a member breaches the in-house asset provisions, so this complex strategy is at risk of breaching the sole purpose test.
Keep up to-date with your compliance requirements as an SMSF trustee. Contact Michael Kloeckner: michaelk@clime.com.au – 0488 188 309
Alternatively, register to attend an upcoming SMSF & Estate Planning Event:
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