How to avoid an SMSF tax disaster

The Australian Taxation Office is not your friend.

If there’s one thing entrepreneurs hate, it’s a run-in with the tax man. And while the nation’s keeper of the coffers may play nice most of the time, make no mistake – the ATO can be ruthless in clawing back money.

With a budget coming up short, the government is looking to some new places to find some cash – like self-managed superannuation funds.

It’s no wonder – about half of all funds have more than $1 million dollars. It’s a gold mine.

As a result, it’s a good idea to keep an eye on your fund and its tax activities. After all, with the government looking for extra cash, you can expect the ATO to ramp up its scrutiny – and you don’t want to be in the firing line.

While there are no new laws specifically targeting SMSFs (yet), now isn’t a good time to draw the attention of the ATO. A tax disaster could have a big impact on your retirement plans – now is the time to be vigilant.

At the recent Self-Managed Superannuation Professionals’ Association annual conference in Melbourne, Small Myers Hughes partner David Hughes outlined a number of methods to avoid tax disaster.

“It’s important to look at recent ATO activity,” he said at the conference. “There is a fairly interesting and significant involvement in the ATO of hands-on regulation of the self-managed super sector.”

“In 2011-12 there were a larger number of excess contribution cases…raising approximately $175 million in assessments.”

Pay attention – here are five key things you need to know to avoid disaster if you find yourself in trouble with the ATO.

1. The way you present evidence is just as important as the evidence itself

It’s clear the ATO is a pretty mean machine. During the 2011-12 year, the taxpayer only won one ruling.

But there is some relief. Hughes says if you run into trouble with the ATO, the way you present yourself can help your case.

“This seems to be a common thread in these decisions, in that how you present your evidence can very much dictate the outcome of a case,” he says.

“You can have cases that are similar but one will win, and the other will lose, and I would suggest it’s the evidence that is presented and how it’s accepted that is key to how that case is determined.”

Don’t believe it? Check out some rulings. The Dowling AATA49 case this year contains a comment from the tribunal member hearing the case that two specific witnesses were in fact “witnesses of truth” – a phrase Hughes says is important to note.

Another case, which involved a fund making a loan to a related company which represented more than 5% of the market value of the assets, also came with some commentary. Hughes says in the ruling – which was positive – the fund in question had “no history of non-compliance”.

“…and there is evidence, which has not been contradicted, that the Fund was made compliant in June 2010”.

Hughes says both these phrases are significant, as they indicate the tribunal took into account the method by which evidence was presented.

“Evidence, evidence, evidence,” he says. “How you present your evidence to the court is critical.”

“I’ve seen so many cases that could have been won with better presentation.”

2. Get some answers

Similar to the last tip, the ATO doesn’t particularly like it when you haven’t got an excuse for something – small slip-up or not, the tax man wants to see an answer.

A good example: In the Dowling case, a Dymocks executive moved $91,000 to her superannuation account. But due to some mix-ups with the payroll officer, the money didn’t go into her account until July.

There were plenty of problems with the case. But one involved the fact someone had logged into Dowling’s superannuation account between when she had moved the money, and when it was finally cleared – and no one could explain why. Not even Dowling. The ATO didn’t like this, and Hughes suggests it may have contributed to the outcome of the case.

“How you explain a particular piece of evidence that may be bad for you is critical to the impression the tribunal forms,” he says.

“If the evidence had played differently, she might have had a different outcome.”

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