Holley Nethercote’s David Court outlines the ATO's 2012-13 self-managed super fund (SMSF) compliance focus and regulatory developments in areas such as insurance and asset valuations that will affect SMSF practitioners.
The ATO's 2012-13 SMSF Compliance Program
The Australian Taxation Office (ATO) has recently released information on its SMSF compliance focus for the 2012-13 year.
While it is obviously necessary for SMSF trustees, service providers and auditors to pay attention to all aspects of SMSF compliance, it makes sense to give extra attention to the areas on which the ATO will be focusing.
These areas are as follows:
- Illegal early release of benefits by newly established funds: Illegal early release involves the rolling over of a member's benefits to an SMSF, which is then paid out to the member in contravention of the preservation rules.
The ATO regards newly established funds as posing a greater risk than established funds in this regard, and continues to closely scrutinise funds being established. It should also be noted that the Government is proposing to introduce a penalty regime for promoters of illegal early release schemes.
- Lodgement of annual return: An SMSF can only achieve full complying status once it has lodged an annual return (although it will still qualify in the interim for concessional tax rates and is eligible to receive rollovers).
The ATO appears to be concerned with the number of SMSFs lodging returns late or not at all, and considers such funds to be more likely to have breached the regulatory requirements.
- Exempt current pension income and non-arm's length income: Each of these types of income have non-standard tax treatment – the first being exempt from tax, and the latter being taxed at the top marginal rate. The rules for both are fairly technical and prone to miscalculation.
- Re-reporting of contributions and excess contributions tax (ECT) releases: The ATO is looking out for funds that refund a ‘mistaken’ contribution that just happened to trigger an ECT liability.
Hopefully, the new arrangements permitting a ‘one-off’, limited refund of ECT will reduce the incidence of such conduct in the future. The ATO is also looking to ensure that ECT release authorities are acted on by the trustees of the relevant fund.
- Auditor contravention reports: SMSF auditors are required to inform the ATO of contraventions that come to their attention.
These reports are, obviously, a prime indication to the ATO that an SMSF is not complying with the law – and more than likely to be investigated further by the ATO.
These focus areas are essentially the same as those which the ATO raised for the 2011-12 year. However, one new development is that the ATO has determined to conduct a "comprehensive" audit of 25 of the 200 largest SMSFs by asset value.
New SMSF regulations
The second development has been the making of new regulations applicable to SMSFs in the following areas.
Insurance cover
An SMSF trustee must consider whether the fund should hold insurance cover for one or more members of the fund.
However, the new regulation does not specify what type of insurance cover the fund should consider holding.
Theoretically, it might require the trustee to consider whether the fund had adequate general insurance cover (such as building cover or audit insurance cover) on the basis that payments received under such policies ultimately benefit the members.
However, the regulation specifically contemplates that the trustee will hold an insurance contract that provides cover for a member.
This would pretty much confine the trustee’s consideration to death and disability cover.
The Super System Review report recommendation (on which the new regulation is based) refers specifically to life and TPD cover, and it seems fairly clear that the trustee must give consideration to these types of cover.
However, it is not as clear whether the trustee also needs to consider salary continuance and/or trauma cover – which superannuation funds can also provide.
Regular review of investment strategy
In addition to the existing requirements to formulate and give effect to an investment strategy, the trustees must now ‘review regularly’ that strategy.
What constitutes a ‘regular’ review is not specified, and will need to be determined by the trustees having regard to the changing circumstances of the fund and the nature of the investment strategy.
However, it is hard to imagine that the ATO will be impressed by a trustee that decides to review their fund's investment strategy ‘regularly’ every five or 10 years.
Keeping the assets of the fund separate from personal assets
This has actually been a legal requirement applicable to superannuation fund trustees since the commencement of the SIS legislation.
However, to date it has only been a covenant that is required to be included in the governing rules of the fund. As such, a breach of the covenant was not an offence (and could not result in a loss of complying fund status).
Rather, it permitted a person who suffered loss as a result of the breach to recover the loss against the trustee.
The obligation is now also a prescribed operating standard so that a breach is now an offence and can now lead to the loss of complying fund status.
Asset valuations
SMSF assets must be valued at ‘market value’ (rather than historical value) in the 2012-13 accounts.
Market value is defined in the legislation and is a concept that is already used in a number of areas of SMSF regulation.
Presumably, the new rule will require SMSF trustees to determine the market value of the fund's assets as at 30 June 2013.
While doing so should be relatively easy in relation to investments having a ready market (such as securities), it could pose difficulties in valuing personal-use assets or real property, and professional valuations might need to be obtained.
As can be seen, a number of practical issues arise out of these new regulations, and it is hoped that the ATO might clarify the practical application of these requirements by issuing policy guidance.
David Court is a lawyer at Holley Nethercote Commercial and Financial Services Lawyers.
