It is probably no coincidence the rapid growth in the number of self-managed superannuation funds (SMSFs) coincided with the two years during which conventional Australian superannuation fund returns dipped into negative territory.
Indeed, when Australian Prudential Regulation Authority (APRA) data on the growth of self-managed super funds is compared with the level of returns achieved by conventional funds through 2002-03 it is easy to see the correlation.
If one thing effectively placed a brake on that rapid growth, it was the attention directed towards SMSFs by the regulators — the Australian Securities and Investments Commission, APRA and the Australian Taxation Office (ATO).
But it has been the ATO that has had most carriage of the regulatory issues surrounding self-managed funds, and it has been the ATO that has been dictating the agenda — something reflected in a speech by assistant deputy taxation commissioner Ian Read late last year.
In that speech, Read outlined the rapid growth in self-managed funds over the past half decade, pointing out that since 1999 there has been 110,000 new fund registrations in Australia, taking the total number of self-managed funds to over 300,000, holding about $165 billion in assets.
Just as importantly, he pointed out that 67 per cent of those funds were two-member funds and the average assets held in the funds has grown from $184,000 in June 2004, to $285,000 in June 2005.
The ATO’s involvement as a regulator where self-managed funds are concerned becomes obvious when you consider that over 90 per cent of them lodge their income tax and regulatory returns through tax agents.
In the lead up to the introduction of choice of superannuation in July 2005, there was widespread speculation that many people would take the opportunity to opt out of conventional retail, corporate or industry superannuation funds to start up a SMSF.
This did not happen. Statistics compiled by both APRA and the ATO over the past financial year have revealed that growth rates have actually declined.
This seems to be best explained by the tough regulatory approach adopted by the tax office and the warnings issued by ASIC. But the key appears to have been the move by the ATO from an initial approach based on education to a tougher approach based on compliance.
“Since commencing as regulator of self-managed funds, we have focused our efforts on education, providing helpful material for trustees, their advisers and those interested in self-managed funds,” Read said.
“The focus on education was to highlight responsibilities and obligations imposed under the Superannuation Industry Supervision Act.”
“You will now see a fundamental shift in the way we approach self-managed funds. We will definitely maintain education as a key consideration, but compliance will now be taken to a higher level.”
The ATO left no one in any doubt about its agenda with respect to self-managed superannuation in 2006 declaring that it would focus on lodgement compliance and active compliance.
It said its lodgement compliance efforts would be focused on funds meeting the requirement to lodge fund income tax and regulatory returns and that a significant number of funds would be contacted throughout the year with respect to non-lodgement issues.
Where active compliance is concerned, the ATO said it will undertake audit programs aimed at trustees, funds themselves or approved auditors.
it said the active compliance program would look at specific issues including:
acquisition of assets from related parties;
auditor contravention reports;
in-house assets;
misuse of assets and personal use of funds assets; and
fund ownership of assets.
The ATO said that when looking at funds it would consider their overall risk profiles, paying particular attention to high risk funds linked to tax agents that have not previously been visited, funds that have discrepancies, funds that have previously used assets inappropriately, illegal early access schemes and other arrangements detected by ATO profiling.
