Self-managed super in the ATO’s sights

While Jeremy Cooper might be powering along with his review of the superannuation system (his report is due by June 30, 2010), the ATO continues to flag concerns it has regarding the operation of self-managed super funds (SMSFs). And with over 400,000 of them in existence, holding more than $370 billion in assets, a lot of people are in the ATO’s sights.

The ATO has been warning for some time that SMSFs and their trustees need to get their houses in order. As the regulator of such super funds, the ATO of course, has a vested interest.

The ATO is even running seminars during March and April 2010 for trustees of SMSFs to help them increase their knowledge about their responsibilities and obligations.

While the Tax Commissioner acknowledges that the vast majority of trustees and professionals involved with SMSFs are trying to do the right thing by adhering to the rules (eg. carefully managing their funds and lodging returns on time), there are still some problem areas. Let’s look at a few.

Illegal early release of super

To help guard against schemes involving the illegal early release of superannuation benefits, the Commissioner said, effective from this month, new SMSFs will not be registered until the Tax Office is satisfied they are legitimate. Until recently, registration of a new SMSF could occur quickly (within a few days), and by the time the ATO identified a new fund as risky, it may already have been too late.

This upfront risk assessment work by the ATO for new SMSFs will add a few working days to the registration process, but the ATO expects that the vast bulk of new registrations will still occur within five working days. Any SME looking to set up a self-managed fund should keep this in mind.

Verifying rollovers to new SMSFs

In another development, new SMSFs that have not yet lodged their first return will now be given a new status on the ATO’s register as “registered – status not determined”. This status is designed to flag to APRA-regulated funds (ie. funds with fewer than five members) the need to take additional care in processing rollovers to these SMSFs.

The ATO has also developed, in conjunction with the industry, additional guidance about the steps large funds can take when processing rollovers to these new SMSFs. These steps include:

• determining if a SMSF trust deed exists;
• establishing if an investment strategy has been created; and
• obtaining documentation in regards to the establishment of a bank account.

Lodgment compliance

The ATO is happy that lodgment compliance rates for SMSFs are improving, with on-time lodgment of first year returns up by 11% for 2008 returns. However, it is concerned that there are a small but significant number of funds that have a poor lodgment compliance record. A pilot exercise is well advanced in respect of some 250 funds who have failed to meet their lodgment obligations. Any SMEs affected will no doubt already be aware of this.

Self-managed funds that fail to meet their lodgment obligations can also be prosecuted or made non-complying (meaning they can lose their tax concessional status). In a recent case before the courts, the corporate trustee of an SMSF was prosecuted for failing to comply with court orders to lodge two outstanding income tax returns. The Downing Centre Local Court in Sydney convicted the trustee and imposed the maximum fine of $55,000.

Related party loans

The ATO is also concerned that 19% of all contraventions reported to it by approved fund auditors are for breaching the prohibition on SMSFs providing financial assistance to a member or relative. These loans are often used to “prop up” personal business operations by providing additional cashflow. This can be a very tempting avenue of funds for a cash-strapped business, but the warning is clear that this breach of the law will not be tolerated.

Excess contributions tax

The ATO is particularly concerned that many taxpayers are inadvertently exceeding their super contributions caps and may be unaware that it will result in an expensive tax consequence (as I note below).

The concessional contributions cap is $25,000 per annum (indexed) for the 2009-10 financial year and later financial years (it was previously $50,000 pa). A transitional concessional contributions cap of $50,000 pa applies for those aged 50 and over for the 2009-10, 2010-11 and 2011-12 financial years (was previously $100,000 pa).

As I mentioned in a recent column, exceeding the caps has a real sting – the amount by which the contributions exceed the relevant cap is taxed at an effective tax rate of 46.5%.

To help prevent inadvertent breaches following the halving of the concessional contribution caps from 2009-10, the ATO has now written to taxpayers it has identified as “at risk” of breaching the reduced caps. Those who are particularly at risk of being caught by excess contributions for 2009-10 include:

• people with pre-existing salary sacrifice arrangements that have not been reviewed and lowered, particularly those aged under 50 whose cap is now $25,000pa;
• people who make or receive some of the less common types of contributions, including members of defined benefit funds with notional taxed contributions; and
• people who contribute to super and don’t keep track of their contributions.

It might be argued that reducing these caps basically sends the wrong message about super, but the law is the law, and SMEs need to be very aware of where they stand.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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