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Self Managed Super Fund (SMSF) Article
Taxman Spells it Out in Black & White

By Tony Negline.

This article may be out of date.

28th July 2004

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Last week the Australian Taxation Office gave us proof that Self Managed Super Funds are not a sideline to the large employer and fund manager super funds.

The proof has come via a document called, DIY Super – It’s Your Money … But Not Yet.  The publication points out there are now 300,000 SMSFs with over 560,000 members and an average account balance of about $235,000.

This document details how the ATO intends to supervise SMSFs over the coming years and what it expects from SMSF trustees and advisers.

Since taking over as regulator of these funds from the Australian Prudential and Regulation Authority in 1999, the ATO has spent the last five years educating SMSFs trustees and advisers on what rules the funds should follow in order to comply with all regulatory requirements.

The ATO believe that the time for being an understanding and reasonably lenient regulator who understands and accepts ignorance of the law by trustees and their advisers is no longer appropriate.

Essentially this new ATO publication puts everyone involved in SMSFs on notice.  The document says that the ATO intends to be tougher.  Importantly they will not be so tough that every fund will face penalties.  (At a practical level it is impossible to comply with every regulatory requirement.)

As part of the Federal Budget the government has given the ATO additional resources which has translated into an extra 40 auditors who are able to look at more SMSFs in greater depth.

The ATO’s Deputy Commissioner for Superannuation Mark Jackson told us that the ATO could probably slap a fine equal to 48.5% of the market value of the assets of a fund whenever it found a fund had failed to comply with a regulatory requirement.  Mr Jackson said that in some instances this penalty is appropriate.

If the ATO were to apply this penalty at every available opportunity, it would raise a significant level of revenue for the government but more importantly very few SMSFs would provide their members with a meaningful retirement benefit.  The ATO could hardly claim to be a successful SMSF regulator if this occurred.  So the ATO says it intends to be sensible in how it regulates SMSFs.

The ATO deserve credit for drafting this document.  All SMSF trustees and their advisers should get hold of a copy of it and read it.  The ATO will be sending paper copies of this document to the 37,000 auditors it currently has on its books and will be sending a paper copy of this document to the trustees of every new SMSF established.  Existing SMSFs can get a copy by calling the ATO (131020) or by going to the following link: http://www.ato.gov.au/super/content.asp?doc=/content/47067.htm

SMSFs are hear to stay and collectively are big business.  If all these funds could form a united voice they would be an extremely potent force of higher net worth individuals.

The following circumstances are likely to attract the ATO’s attention:

  1. Any fund which has been reported to the ATO as having a compliance problem by fund’s independent auditor.  (If the fund is reported to the ATO then a good strategy is to clean up the fund before the ATO make contact.)
  2. A fund’s assets include a linked or related trust.  (This doesn’t mean you can’t use these arrangements but if you do, make sure the arrangement is squeaky clean.)
  3. A fund which has not been reviewed by the ATO for more than five years
  4. A fund has a low asset value (under $40,000) and has not yet been selected for review.
  5. A fund claims non-specified deductions that appear to be high compared to its asset value.
  6. A fund claims amounts at the salary and wages label.
  7. A fund claims excessive management and investment expenses.
  8. A fund reports employer contributions in its income tax and regulatory return, but does not send a corresponding member contributions statement to the ATO.  This may indicate an attempt not to pay the super surcharge.
  9. A fund that pays a lump sum or begins to pay a pension to a member which are not reported to the ATO.
  10. A fund is established and wound up in the same year.
  11. A fund has experienced a significant drop in asset value but has no reported benefit payouts for Reasonable Benefit Limit purposes.
  12. A fund has the same address for service as the reported auditor.  This may indicate the auditor is not acting independently.
  13. A fund reports offshore investments.
  14. A fund reports substantial borrowings in relation to the asset value of the fund.
  15. A fund reports an acquisition from a related party that the rules ordinarily do not allow to be acquired.

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