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Self Managed Super Fund (SMSF) Article
ANAO Report on ATO SMSF Supervision
By Tony Negline.
This article may be out of date.
11th July 2007
Two weeks ago a very important report about the Tax Offices’ administration of Self Managed Super Funds was released.
The report is the first of two produced by the Australian National Audit Office.
This first report looks at the “efficiency and effectiveness of the Tax Office’s approach to regulating and registering” SMSFs. In particular:
- the environment in which SMSFs operate, including the Tax Office’s regulatory roles and responsibilities
- Tax Office’s governance of its SMSF regulatory role, systems, processes and controls it uses to register SMSFs
- enforce the lodgement of fund income tax and regulatory returns
The report notes that when the Tax Office took over the administration of SMSFs in 1999 it was taking on an unfamiliar role covering a part of the super industry well known for lax compliance standards. The ATO took on this role because APRA, which supervised after these funds, did not have the capacity to look after them properly (APRA’s focus has always been to oversee large financial organizations) and the government decided ASIC was not the appropriate regulatory body. Perhaps in time ASIC will succeed the ATO as the main SMSF regulator.
The SMSF market is growing and evolving rapidly in terms of assets under management and the number of people involved. Over the last eight years the ATO’s regulatory approach has had to evolve as its knowledge of the sector improved and with the constantly changing landscape. Unsurprisingly the ANAO found that the ATO could have implemented its supervisory role better. Hindsight is a wonderful thing.
Most importantly the report notes that in 1999 the Government told the ATO that it must ensure SMSFs comply with the non-prudential requirements of the super laws. Examples of non-prudential standards are only accepting contributions when allowed or only paying benefits in the form allowed and so on.
In 2004 the ATO, via legal advice, discovered that the super laws do not clearly make the ATO responsible for prudential supervision of SMSFs. As a result the ATO decided that its job was not to review or comment on specific investment strategies prepared by SMSF trustees. Further it doesn’t look to see if a fund is financially sound. With large super funds APRA takes a very different approach because it actively gets involved in these aspects of running those funds. The ATO’s approach can be justified for three reasons – it is looking after so many funds and the cost of performing this function would be prohibitive, the approach is consistent with the ATO’s overall operating approach and the government told the ATO that small fund trustees could look after their own interests.
Clearly how and what the ATO does in relation to supervising SMSFs is not completely obvious. We are told that the ATO is developing information seeking to provide transparency.
In total the ANAO made six recommendations and the ATO agreed with all of them:
Firstly, the ATO needs to be very vigilant in collecting information and intelligence about investment products specifically targeted at SMSFs. The ANAO also suggested that the ATO needs to approach Treasury in a timely fashion about any particular concerns.
Further, the ATO needs to accurately work out how much it costs to supervise SMSFs so that we will all know if the supervisory levy collected adequately covers these costs. At the moment the ATO is only able to estimate how much SMSF supervision costs. In 2005/06 the ATO guessed that it spent $30 million on this job but only collected $13 million in the then $45 per annum supervisory levy. This helps to explain why the government has increased this levy to $150 per annum. The ATO currently does not seek to recover unpaid SMSF levies and the ANAO estimates that since 2000/01 over 200,000 SMSFs have not paid the annual levy.
The ANAO has also suggested that the ATO needs to get a better handle on SMSF statistics such as the number of funds and, in particular, total assets. The ANAO proved that ATO SMSF data is poor for a variety of reasons.
For example over 24,000 SMSFs have never submitted an annual return. Either these funds have been wound up or the trustees of these funds couldn’t be bothered to communicate with their regulator. In the 2004/05 financial year, about 30% of all SMSF did not lodge their income tax and regulatory returns on time. Eight percent still haven’t submitted a return. The reasons for late lodgement will be many and varied but unfortunately the report doesn’t provide any details.
Fourthly, the ANAO says the ATO needs to be more careful when initially registering newly created SMSFs as there appears to be a number of systemic failures. A number of funds do not appear to have any members and others have more than four members. Additionally some funds do not appear to have any assets.
Finally the ATO has agreed that it needs to do more to ensure people who are not allowed to be SMSF trustees do not continue in this role.The second ANAO report is due to be released sometime in the next six months. This report is eagerly awaited and will focus on “the efficiency and effectiveness of the Tax Office’s approach to managing” SMSF compliance risks.
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