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Self Managed Super Fund (SMSF) Article
ATO Research Questions
By Tony Negline.
This article may be out of date.
6th February 2008
It is always tempting for SMSF trustees to ignore their legal requirements. Many trustees seem to believe that if they muck things up the only people they penalize is themselves and their relatives.
Unfortunately governments of all persuasions don't agree with this view. For almost twenty years the responding argument has been that the community gives large tax benefits to superannuation and it would be unfair if these concessions were given to super funds not doing what society thinks is the right thing. Additionally every SMSF that fails may also cause a slight increase in government age pension outlays so a failed SMSF can cost the government quite a lot of money throughout its existence.
Until very recently SMSF compliance with the super laws was generally woeful and the ATO hasn't had the resources to adequately address the problems.
If it wants to, the Tax Office can make the life of any SMSF trustee miserable if they flagrantly break the rules especially as the ATO now has an explicit budgetary allocation to more effectively supervise the sector.
Sensible SMSF trustees should think carefully about their disdain for the super laws because they will realize that continuing problems with the sector will lead to increased and less flexible regulation. The sensible SMSF trustees will want to operate their super fund within the boundaries that the ATO deems suitable.
So what does the ATO find acceptable? The ATO has produced a range of excellent guides. But trustees should be careful as these documents are starting points and are no substitute for definite knowledge.
Another source of information which tells trustees the areas the ATO is focusing on is the questionnaire the ATO gives to trustees of new SMSFs. On the covering note to the paper form, the ATO says that "as we are assessing your knowledge as trustee of the fund, the … questionnaire must be completed by you and not your accountant, tax agent or advisor."
The questionnaire delves quite deeply into the operations of a SMSF and the ATO provides no guarantees that the material will not cause follow-up activities if they find information which it doesn't like.
So what are some of the key areas (which incidentally are also a good list of items all SMSFs should be thinking about as part of their planning for the year)?
- Are your membership and trusteeship correctly aligned? In general all members of the fund must also be trustees and no one else should be involved. There are special rules for children under 18, bankrupts and the mentally incapacitated
- What is the Sole Purpose Test? Can you briefly explain what the legal requirement is that specifies the only reason why your super fund can exists? Principally fund assets cannot be used by members or their relatives. Another question asks the trustees if any fund assets are being used personally or privately. You might have a problem if you can explain the Sole Purpose Test but members are using fund assets
- Specific data about your SMSFs assets such as, where the super fund has invested its assets, contributions paid, amounts transferred into the fund from other super funds, what assets have been sold or transferred into the super fund by its members and how that asset was valued. The ATO is aware that some SMSFs do not provide accurate data on their annual returns. Collecting data via this survey will help the ATO quickly identify if mistakes have been made or inappropriate activities have occurred, such as illegally using super fund assets incorrectly
- Has the fund developed an investment strategy? This is a legislative requirement. If the trustee says no then straightaway the ATO has a reason to look more closely at a fund. If the trustee says yes then the trustee is asked to briefly explain the investment strategy. As the ATO will also know specifically what the trustee has invested in, they will have a better idea if the trustee has actually followed the investment strategy
- Can the fund borrow money and if yes when can this take place? Super funds can only borrow money in limited circumstances but some funds have ignored this prohibition. The ATO is obviously keen to make sure that new trustees don't fall into the same trap
- Can a trustee lend money or give financial assistance of fund members or their relatives? The answer is no, but clearly if a member says yes the ATO might want to make follow up action
- A range of basic administrative issues are examined, such as, are all the fund's assets held in the name of the fund (if no, why not?) and does the fund have a separate bank account
Traditionally SMSF trustees have been able to hide behind their ignorance when the ATO have identified problems. Any trustee who completes this survey will not be able to argue that they are unaware of their obligations.
Once the ATO has a good data sample they have said that they will use the data to improve the documents they make available to trustees. They have also said that they will release collated data which will no doubt make interesting reading.
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