ATO action to reduce the gap

The tax environment for small super funds is concessionary. This means the tax consequence of non-compliance, due to errors or deliberate acts, is less than in other populations.

However, we still focus on ensuring super funds pay the right amount of tax. We have a multi-faceted approach which includes:

• providing tools and resources to assist funds to understand and meet their obligations
• mitigating risk with a targeted and tailored approach to identify and respond to risk
• actively engaging with and seeking feedback from small super fund stakeholders.

Super fund life cycle

Our approach to managing this tax gap recognises key activities that occur during the 3 inherent phases of a fund's life cycle:

1. establishment phase – initial setup and investment activities
2. accumulation phase – wealth building activities
3. retirement phase – starting an income stream during retirement.

We undertake targeted communication and education strategies. This ensures trustees, advisers and industry professionals are aware of their obligations and understand our compliance stance during each phase.

We use several strategies to identify both potential and actual non-compliance. The first line of defence is our new registrant program where each new application is risk assessed. This looks to ensure individuals establish their small super fund for the sole purpose of providing them with retirement benefits.

We check that only individuals with a genuine intent of establishing and maintaining a compliant super fund enter the system. In this way, we seek to prevent the tax gap arising from illegal early release and promoter activity.

During the life of the fund, we use intelligence from the annual audit process undertaken by SMSF approved auditors. Where non-compliance is reported, we take a risk-based approach to applying tailored correctional action according to the severity of the issue.

We also have specific strategies for compliance risks of high value funds, non-lodging funds and those looking to inappropriately access concessional tax treatment through profit-shifting arrangements.

Our risk strategies are reviewed and validated twice a year to reflect the changing nature of compliance risk. Our areas of focus include:

• reviewing and validating the competency of the work completed by SMSF auditors
• reviewing our highest value funds to ensure that inappropriate wealth accumulation strategies haven't been used
• prosecuting promoters of illegal early release schemes who target vulnerable trustees
• taking action to ensure trustees of funds who haven't lodged annual returns bring their lodgments up to date, or cancel their registration and cease operating as a small super fund
• applying differentiated treatments to encourage self-correction and ongoing compliance, including
  • enforceable undertakings
  • direction to educate
  • direction to rectify
  • administrative penalties
  • notice of non-compliance
  • disqualification of individuals
  • civil or criminal prosecution. 
   

Table 2 shows the population of self-managed super funds that lodge, compared to those that are registered, over the period 2014–15 to 2019–20.

This data is displayed in Figure 2. It shows a trend in increasing numbers of registered funds not lodging an annual return. Work is underway to understand the drivers and assess if retirement savings have been illegally withdrawn before funds being abandoned.

Figure 2: Population of self-managed super funds that are lodged and registered, 2014–15 to 2019–20