What are the ATO's SMSF compliance targets for FY17?
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The ATO has cautioned that non-lodgers, various "tax planning" arrangements and collectables will all be in its cross-hairs this financial year.
Fewer SMSF trustees and their funds were penalised by the ATO in fiscal 2016, with the ATO pointing to its more collaborative approach. However, it has warned that non-lodgers, various "tax planning" arrangements and collectables will all be in the spotlight this financial year.
Speaking to the Tax Institute in Melbourne in late August, ATO assistant commissioner Kasey MacFarlane said the fiscal 2017 compliance program would "see a stronger shift towards supporting and assisting trustees who are willing to engage with us to self-correct and rectify regulatory issues," including through its recently launched advisory service, "Super Scheme Smart".
In fiscal 2016, there was a 38 per cent reduction in the number of funds with enforceable undertakings, although the number of rectification directions increased by 70 per cent.
MacFarlane also noted a fall in the number of trustees disqualified and a "significant reduction" in the number of funds made non-compliant, with the ATO taking a "judicious approach" in applying administrative penalties to "a few hundred funds".
Michael Cameron, a director at accounting group Williams Hall Chadwick, said the ATO's penalty regime could apply to "what could be considered quite minor breaches--and the penalties can be up to $10,000 per trustee".
"It's a real area of focus for the ATO as they want to make sure the system is robust and trustees are acting in accordance with legislated duties. There are people with millions of dollars in super not paying any tax, and that wasn't the intention behind super--it's to provide for retirement, not to be abused in estate planning."
Among compliance targets for fiscal 2017, MacFarlane said non-lodgers would face greater scrutiny, with 68 per cent of those targeted yet to respond to the ATO's approaches.
"If trustees are not willing to engage with us to bring lodgements up to date and rectify any fund irregularities, then this strongly indicates the fund should be exited from the system. Our response is to facilitate this and in many cases we will disqualify the trustees," she said.
MacFarlane also noted some "emerging schemes" which encourage small business owners and professionals to abuse super tax concessions. These include dividend stripping, where the shareholders in a private company transfer share ownership to a related SMSF so the company can pay franked dividends to the fund, thereby stripping profits from the company tax-free.
According to MacFarlane, the ATO is investigating 53 cases involving an estimated $24 million in such credits, with trustees facing the prospect of disqualification and potential fund non-compliance.
Another area of concern is non-arm's length LRBAs "established or maintained on terms that are not consistent with an arm's-length dealing," with trustees having until 31 January 2017 to ensure compliance.
MacFarlane also highlighted cases where an individual (typically with an SMSF in pension phase) diverts income earned from personal services to the SMSF, where it is concessionally taxed or treated as tax-exempt, instead of being taxed at the individual's marginal tax rate.
"Individuals and trustees who come forward before 31 January 2017 will have administrative penalties remitted in full," she said, although shortfall interest charges may still apply.
An emerging issue highlighted by MacFarlane is where SMSFs "have become either directly or indirectly involved in business undertakings, commonly property development enterprises".
According to the assistant commissioner, while SMSFs can undertake such ventures, "significant caution" is required to avoid breaching regulations, including related party rules and non-arm's length transactions, as well as the sole purpose test.
"If extreme caution is not exercised, significant regulatory and income tax issues can arise which may risk members' retirement savings," she said.
New rules concerning SMSF investments in collectables also came into full operation on 1 July, with such investments totalling an estimated $428 million as of March 2016.
According to MacFarlane, with very few SMSFs having approached the ATO for guidance concerning the rule change, this could become an area of potential focus following the fiscal 2017 annual independent audits.
SMSF auditors scrutinised
Meanwhile, the number of SMSF auditors registered with ASIC has shrunk to 6,700 from 11,500 before the registration requirement.
MacFarlane said the ATO continued to monitor SMSF auditor compliance, including for independence, such as where the auditor of a fund is also acting as the tax agent.
"Low-cost auditors" and "high-volume auditors" signing off on 1,000 or more annual audits will also be scrutinised.
With the SMSF sector having grown to encompass nearly 600,000 SMSFs and more than 1 million members, MacFarlane said the importance of SMSF professionals "cannot be underestimated" with around 2,500 new registration applications received each month.
Liam Shorte, director at Verante and an SMSF specialist adviser, said the ATO also planned to beef up pre-setup checks with new trustees, including high-risk factors such as young age, low balances and multiple unrelated members.
"They will be seeking to understand the level of knowledge the trustee really has of their obligations and duties, who really recommended the fund set-up and that the trustee is suitable to run a fund," he said.
"The information on who recommended the set-up could be shared with ASIC to identify unlicensed advice from accountants or, for example, property spruikers. So, expect closer liaison between the ATO and ASIC."
For SMSF trustees concerned about a possible contravention, Shorte suggested the best solution would be to "fess up".
"Where trustees are willing to engage with the ATO early on, they will be supported to self-correct and rectify compliance issues through the early engagement and voluntary disclosure service and/or from targeted mailouts," he said.
"So it is in trustees' interests to highlight where they have made mistakes and go to the ATO with a proposed solution rather than try and hide the problem. This would avoid a comprehensive audit from the ATO."
For SMSF trustees, the good news is the ATO's focus on "assistance, education and support" for non-compliance, rather than simply dishing out fines.
But for those unwilling to collaborate, the tax authority is still ready to impose a financially painful rap on the knuckles or even worse.
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