A PRESENTATION FROM THE ATO

Tara McLachlan, Tax Counsel Network, ATO

SISFA 10th Annual SMSF ForumCurrent focus areas for the ATO common errors and what’s drawing our attention

Tara McLachlan

Senior Tax Counsel, Tax Counsel Network

Australian Taxation Office

Common mistakes SMSF trustees make

Areas where we often see trustees making mistakes:• new registrations• sole purpose test• loans• in-house assets• separation of assets• borrowings• administration• auditor independence

Ensure your SMSF is set up correctly! We suggest using our checklist (QC42297)

New registrations and the role of professionals

Two common errors at registration stage:• failure to properly set up the SMSF before applying for the ABN• not providing accurate or complete details of members, trustees or

directors of the corporate trustee

SMSF professionals have an integral role to play as part of the registration process• review your clients’ tax, debt and lodgment compliance history• make sure your clients have a clean bill of compliance health• Plan ahead for unexpected life events such as marriage, divorce, illness or

death

From the outset, prepare an exit strategy!

Common breaches of SMSF rules

• Sole purpose test• Loans• In-house assets• Separation of assets• Borrowings

Sole purpose test

All investment decisions should be for the sole purpose of growing and providing retirement benefits

Investments proving current day benefits may contravene the sole purpose test

Breaching the sole purpose test can havesevere repercussions for trustees – Hart’s case

Loans

The lending of fund money or financial assistance to members or relatives of members of the SMSF is prohibited by law.

Payments to members need to meet a condition of release

Retirement benefits are preserved and can only be paid inspecific circumstances

In-house asset rules

SMSFs are only allowed to have 5% of the fund’s total assets as ‘in-house assets’

Generally an in house asset is any of the following:• a loan to, or an investment in, a related party of the fund• an investment in a related trust of the fund• an asset of the fund that is leased to a related party

Tips and important considerations– there are some specific exceptions to when an asset is an in-house asset– make a list of all related parties and check when making an investment– If unsure, seek advice!

Separation of assets and borrowing arrangements

Ensure assets are registered in the fund's name

SMSFs are generally prohibited from borrowing – there are some exceptions such as a limited recourse borrowing arrangement (LRBA)

Important consideration• for a LRBA - check the super law allows the SMSF to acquire the

underlying asset• get good advice to avoid borrowing contravention

Common SMSF administration issues

Some of the most common mistakes we see trustees making occur around the maintenance and administration of their SMSF

Advisors should assist trustees with:• drafting and updating the trust deed• maintaining the investment strategy• meeting lodgment obligations • managing the annual audit process• holding a valid bank account and electronic service address

The trust deed and investment strategy

Trust deed - important to review regularly and updated as necessary• Important where there has been change in the law or a significant court case• Changes in the law could result in a breach of trust if the deed has not been

updated to align with the new law

Investment strategy - should be reviewed regularly taking into consideration:• individual circumstances of each member and the general condition of the

fund• retirement goals of members• liquidity or growth needs reflecting the accumulation or retirement phase • current economic and market factors

Lodgment obligations

It is important to lodge SMSF annual return on time

The SMSF annual return provides: • assurance that everything is on track• visibility or transparency in relation to the fund’s

compliance with super laws

Remember, for a new SMSF the annual return due dateis 31 October

Auditor auditHaving the SMSF audited is a key legal requirement for trustees

SMSF auditors must be registered with ASIC and be seen to be free from bias, personal interest and association

Auditor independence is something we take very seriously because approved SMSF auditors perform a critical role in maintaining the health and integrity of the SMSF system

An auditor’s failure to comply with the independence rules can have serious consequences

Consider appointing a SMSF auditor early

Bank account details and electronic service address

Making sure we have the right details for the SMSF helps us to help you:• ensure the SMSF maintains a separate bank account in the

name of the fund• ensure the fund’s electronic service address is valid

Did you know that many of the future technological improvements for the SMSF Sector rely on us having valid details for the SMSF?

Specific areas of concern

Transition topics attracting our attention:

• market linked pensions

• exempt current pension income

• transition-to-retirement income streams

Emerging potential risks attracting our attention:

• the use of reserves

• multiple SMSFs

• tax planning and streaming arrangements

Market-linked pensionsUnintended consequence of exceeding the transfer balance cap where:

• market-linked pensions that are capped defined benefit income stream are

commuted on or after 1 July 2017 resulting in a transfer balance debit of nil, and

• individual then subsequently commences a new market-linked pension

Our practical compliance approach, at this stage, will be:

• no compliance action if a fund does not report the transfer balance account events

of the commutation or the commencement of the new market-linked pension

• we will not apply compliance resources where the fund has reported the transfer

balance debit for the commutation as other than nil

Super Client Relationship Team Alert 006/2018

Exempt current pension income (ECPI)

A SMSF may require an actuarial certificate to claim ECPI in the SMSF annual return

Refer to updated web content at www.ato.gov.au (use quick code QC21546)

If a fund can choose, to use the segregated method it needs to document that it has specifically identified assets to support its retirement phase income streams

Transition to retirement income streams (TRIS)

SMSFs are no longer able to claim 0% tax rate on earnings unless the

TRIS is in retirement phase

A TRIS will only be in retirement phase if:

• the member is 65 years of age, or

• is retired, permanently incapacitated or terminally ill and has

notified trustee of this

SMSFs and reserves

SMSF Regulator’s Bulletin SMSFRB 2018/1• The use of reserves is not prohibited but there are limited circumstances when it

is appropriate to establish and maintain a reserve in a SMSF

• We expect to see the balance of reserves reducing

• Allocations can not be made to an account-based income stream

Outside of the legitimate reserve purposes contemplated by the Bulletin:• any unexplained increase in the creation of new reserves • increases in the balances of existing reserves maintained by SMSFs, or • allocation of amounts from a reserve directly into the retirement phase

is likely to attract close scrutiny from us

Reserves – role of trustees and advisors

Before giving effect to any reserving strategy:• it is important to carefully review the SMSF’s trust deed to ensure that

it has the ability to create and manage a range of fund reserves

• consider section 115 of the SIS Act and whether the use of a ‘general’ reserve to which trustees are allocating amounts has a clearly articulated purpose

Reserve amounts must be maintained in line with the sole purpose test

Multiple SMSFs

There may be genuine reasons for having multiple SMSFs including blended families, large families or differing investment strategies due to different life stages

We are concerned about the potential deliberate use of multiple SMSFs to manipulate tax outcomes

In particular we will focus on:• disregard of the small funds asset provision• switching each of the respective funds between accumulation

and retirement-phase, to artificially segregate pension assets

Tax planning and streaming arrangements

We are monitoring arrangements designed to stream income into the concessionary treated SMSFs

Arrangements we are concerned about include:

• dividend stripping

• personal services income

• related-party arrangements

• granting legal life interests over commercial property

High balance funds

We are reviewing our highest balance funds to ensure money moving into the fund is taxed at the right point and individuals are not taking advantage of concessional tax treatment

Specifically, we will be looking at:

• non arm’s-length income

• dividend stripping

• structured tax arrangements

Common issues with TBAR reporting

• Reporting commutations that occurred on or before 30 June 2017ØOnly events that occurred after 30 June 2017 and

later, need to be reported• including the incorrect ABN or TFN for the fund or the

member • incorrect values• missing information, particularly the date of birth for a

member • reporting pensions not paid by the SMSF

Correcting reporting information

If you need to correct information already reported to us you must cancel the original report and lodge a separate report with the correct information

If you do not cancel the previously reportedincorrect information we will not know it iswrong and will treat the ‘amendment’ as anew event – therefore resulting in duplication

Cancel the event, rather than reporting the “opposite” event

Cancelling incorrect information

Cancelling tips and tricks• Using BDE

– Talk to your software provider/administrator

• Using the paper form– You need to complete 2 forms – 1 to cancel the incorrect report

and 1 to report the correct information

To cancel the incorrect report clearly mark the Yes box

Cancelling incorrect information

Cancelling tips and tricks• Using the spreadsheet

– You need to complete 2 spreadsheets – 1 to cancel the incorrect report and 1 to report the correct information

To cancel the incorrect report select Yes from the drop down on the cancellation row indicator (row 39)

Note: You only need to cancel the incorrect information. DO NOT re-lodge the full worksheet.

What should individuals do if an excess transfer balance (ETB) determination is received?

Individuals can choose to:• Commute the excess amount from a pension• Send an election, indicating which pension to commute, to

the ATO – we will then send an commutation authority to the fund that pays that pension

• If individuals choose to commute the excess amount from a pension – the fund must report to ATO 10 days after the end of the month in which the commutation occurred

• Remember – individuals cannot elect a capped defined benefit income stream to receive a commutation authority – they won’t be listed as an option

What should individuals do if an excess transfer balance (ETB) determination is received?

Where an individual receives an ETB Determination we encourage them to:• commute the excess amount (including cents) stated on the ETB

Determination by the due date• For the fund to report the commutation to us no later than 10

business days after the end of the month in which the commutation occurs

If the amount is not commuted and reported to the ATO we willsend a commutation authority to a fund, even if the amount isvery small be - we do not have the capacity to disregard anyexcess amounts

What should a SMSF do if a commutation authority is received?

• Action the commutation authority unless the member is deceased or pension is a capped defined benefit income stream

• Report to the ATO by the due date in the commutation authority that it has:Øcommuted the amount set out in the authorityØcommuted as much as possible, even if that is not the full

amountØnot actioned the commutation authority because the

member is deceasedØnot actioned the commutation authority because it related

to a capped defined benefit income stream

Partial commutations

What to remember:• Decide what the payment is, a commutation or a pension

payment, before the payment is made

• Make sure you comply with minimum pension requirements for each pension

• A partial commutation no longer count towards minimum pension payment requirements

• Failure to comply with pension standards, including making the minimum payment, will have consequences, including loss of exempt income, and the triggering of transfer balance events

• Report the commutation to ATO as a transfer balance event

Questions

HOT AUDIT ISSUES– PANEL DISCUSSION

Moderated by Nicholas Ali, Superconcepts

Belinda Aisbett, Supersphere

Sharif Eldebs, Assured Super

HOT AUDIT ISSUES– PANEL DISCUSSION

• 3 year audit cycle• Sole purpose test risks on the back of the

Aussiegolfa case• Whether auditor’s should be monitoring TBAR• Asset valuations and other member balance

manipulations• McGoldrick’s case and Baumgartner case

3 year audit cycle• Treasury are still collating submissions• ATO setting up an implementation group• Changes on the political front• Auditor considerations – trust deeds, office

systems, staffing

Sole purpose test risks on the back of the Aussiegolfa case• First case found the fund failed the sole purpose

test• Appeal found there was no failure of the sole

purpose test• IHA considerations• Consequences for auditors – knowing to ask

questions if there is a sub-trust

Monitoring TBAR?• Data may be relevant for the auditor, but there

is no audit obligation to check TBAR reporting

Asset valuations and other member balance manipulations• Hangover risks from cost base relief – discounting cost

base reset asset sales• Asset valuations crucial re: $1.6m cap and member

account balances for contribution caps• DTL? Provision for disposal costs?

McGoldricks and Baumgartners case• McGoldricks Summary• SMSF invested via a trusted friend of the trustee• Investment was reported in the fund financials as “cash – LSL

Holdings”• Investment was not cash, and was ultimately not recoverable• Auditor signed unqualified audit reports• Initially auditor held not to have caused the loss• Appeal: auditor was held 90% accountable for the SMSF loss

McGoldricks and Baumgartners caseComments by the judge• Auditor was

§ extraordinarily careless§ Critical of the auditor for not communicating with the trustee

directly

• Audit considerations

Baumgartners summary• SMSF set up on the recommendation of planner• Planner invested $6.13m in related parties or entities

associated with the planner• Auditor signed unqualified audit reports• Auditor agreed unqualified reports should not have been issued• Representation letters not always signed by the fund trustee• Auditor’s objective a) fairness of financials b) detection of errors

and c) detection of fraud• Claimed the auditor had a duty of care to point out the

“obvious” conflict of interest

Audit considerations• Engagement letter noted auditor would rely on trustee

valuations• Amending engagement terms in an attempt to remove

trustee ability to sue for losses• Purpose of the audit was “protecting the fund and the

trustee against financial risk”• Auto-audit qualifications• Investment strategy considerations• PI insurance?