Presentation to the SMSF Association 2020 National Conference
Gold Coast Convention and Exhibition Centre
21 February 2020
Plenary Session 5
James O’Halloran, Deputy Commissioner, Superannuation and Employer Obligations
ATO
(Check against delivery)
I'd like to thank the SMSF Association (SMSFA) for the opportunity to take part in your National Conference. I’m aware of some very good sessions across different areas of regulation, advice and practice and I’d like to say that the ATO is always pleased to be an active participant in this annual event.
ATO SMSFA Statement of Intent 2020–23
Today, we've recommitted to the joint ATO SMSF Association Statement of Intent for another three years. On behalf of the Commissioner, I can say it’s a pleasure to recommit to work together across the self-managed super fund (SMSF) sector in a formal partnership with the SMSFA.
The agreement is a public statement of our joint commitment to enhance the level of knowledge and competence in the sector, to build and share insights and, where possible, to minimise the need for regulatory intervention.
For us, the Statement of Intent recognises the importance of the SMSFA to the ATO, respecting your diverse membership of SMSF members, innovators, advisers and auditors. As evident throughout this conference, the attendees represent a broad spectrum of those in the sector.
We recognise and support the importance of SMSFs as a key part of Australia’s retirement income system.
So again, thank you to the SMSFA, your Chief Executive Officer, John Maroney, and to the board, for your ongoing commitment to our relationship.
Regulation of the SMSF sector
As the regulator of SMSFs, we take our responsibility seriously. We want you to succeed in the goals you’ve set for your SMSF. But of course, this requires active and ongoing management by trustees and their advisers.
I note the SMSFA’s 2020 Budget Submission observed, ‘… SMSFs are complex structures that are not for everyone …’. We concur. Some matters can be complex. That's why we want to guide and advise SMSFs so you can be confident of when it’s prudent to engage advisers or contact us, and understand how to best mange your risk appetite. Of course we also remain ready to find ways to educate, provide timely advice and enforce, as necessary, the relevant laws and regulations.
Being an SMSF trustee is at times a balancing act; it requires an appreciation that the decisions you make have both short- and long-term consequences. Simply put, some decisions may be irreversible; so it’s important to remember that from the ATO's perspective, the responsibility always remains with the trustee. Of course, this regulatory approach doesn’t seek to underplay the many important considerations that arise for SMSFs, or their potential ramifications. Be assured that we will do all we can to proactively support the sector and encourage a suitable fit-for-purpose and ‘due diligence’ mindset.
As we head into 2020, we can see the shift in community expectations, on both regulators and the financial sector and advisers. This is a reflection of changed community standards, new investment challenges and the evolving nature of the administrative and cyber security environment.
What remains unchanged, are the legal obligations that come with operating a regulated SMSF. In this period of ongoing reform and changing economic conditions, there’s an increased appetite for more data and statistics from the ATO. While we do all we can to achieve this, it’s important to note that our key source of information is the SMSF annual return. And unfortunately, a relatively large number of SMSFs don’t lodge, hindering our ability to provide fully accurate insights and analysis.
Our role isn't to advise how you should invest. Nor do we advise on your settings in balancing risk and reward or growth. As a regulator and administrator, we provide guidance or advice on how to establish good governance and supporting processes.
Primarily, we want to ensure you know, or have access to the relevant advice, ‘what to do’, ‘when', and ‘how’, well in advance of any potential tax or regulatory risks.
So, over the past year, we’ve sought to bring to your awareness and attention matters and scenarios, which if you find yourself in or are likely to deal with, may place you in an awkward and inescapable position or attract our regulatory attention.
Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
Although SMSFs weren’t directly covered by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, observations were made we can all relate to in our dealings across the sector. We’re therefore mindful of these observations and the recommendations of the Commission in terms of raised community expectations. Of course we remain committed to being a balanced but responsive administrator and regulator. The importance of an organisation's culture, attitude and approach to governance came through very clearly as this ‘public sunlight’ highlighted how decisions, investments and dealings can be viewed when exposed to independent public scrutiny. The question often asked now is, ‘It may be legal, but is it right?’
For quite some time now, the ATO's role in the super sector has been to bring transparency and ‘whole-of-system’ improvements (eg, the SuperStream and Single Touch Payroll reforms which have given people better control and visibility of their retirement savings).
From my perspective, there’s no question about the role or value of SMSFs as a retirement product. And we'll continue to offer support and services to help you succeed, and provide advice on how the Commissioner will administer or regulate the law.
The SMSF journey
Every December, the government releases annual historical cabinet documents. In the 2019 release, were Cabinet papers from 14 December 1998. They included papers on the decision to transfer the regulation of ‘excluded superannuation funds’ to the ATO; excluded super funds are what we now know as self-managed super funds.
The decision to change the regulator arose from the report of the Financial System Inquiry (Wallis Inquiry) which recommended regulation of ‘excluded super funds’ should be transferred from the Australian Prudential Regulation Authority (APRA) to the ATO. We effectively took on this role in 1999. At this conference we’ve shared some highlights of our 20 years regulating and protecting SMSFs, an anniversary we celebrated last October.
The 1998 cabinet papers report that, based on 1997 data, there were some 145,000 ‘excluded super funds’, with assets under management of $27 billion, which was 10.5% of the total industry assets, and only 1.4% of super fund members. Today, SMSFs represent 26% of all super assets; there are 1.1 million members and 600,000 SMSFs.
For the ATO, our journey as an administrator and a regulator has evolved from being an agency framed around a full tax assessment model – where we checked everything – to operating in an era of self-assessment, risk management and providing services to encourage willing participation in the tax and super system.
More recently, we’ve renewed our emphasis on being a truly client-centric organisation, by providing advice and support to the many who do the right thing. Increasingly, we also seek to be transparent in how we administer and regulate and what you can expect from us.
Technology and the SMSF sector
The journey ahead is filled with new challenges. Indeed, the uptake and evolution of disruptive and breakthrough technologies – artificial intelligence, quantum computing, bio-technology, block chain – accelerates ongoing questions about data ownership and access. Indeed much of what was a concept or aspirational even a short time ago is now possible. These realities are not simple matters and require careful consideration.
When it comes to this level of digital transformation, it’s expected across the world that tax administrations will overhaul tax systems to provide streamlined, user-friendly experiences for business owners and citizens alike. We've committed to this direction and over time sought to streamline and improve the community's experience in how they interact with us.
Technology as a service and as a way to ensure integrity in the tax and super system isn't just about digitising invoices or us digitalising the filing of tax and super returns. It requires us to embrace digital transformation as a community
Technology allows us all to do a lot more than we could have imagined; even five years ago. And the ATO has helped implement some major reforms across many industries through the use of technology. As some of you may be aware, we’re leading projects in relation to e-invoicing and business registry modernisation and more recently Online services for agents (which replaced the Tax Agent Portal). Closer to super, we’ve worked with many of you on SuperStream and APRA fund reporting and the improved visibility of super and account balance information through new analytics and technology now available through ATO Online and myGov.
Perhaps to some, data management has been seen as both a means to increase efficiency yet also cost prohibitive. But we’re all on an inevitable journey, and whether as government agencies, businesses or SMFs, we must confront the need for and benefit to be gained from technical and data-driven services. We do appreciate that many SMSFs aren’t yet ready or willing to take up new or expensive technology or software, and we know the take up has been simultaneously positive and problematic. So we do continue to support those who may not be tech savvy, who may have access issues or have special needs.
Therefore, you can still lodge an SMSF return on paper and you can still ring us to make a voluntary disclosure. You can also speak with our call centre staff who are trained to answer your queries. And those registering for a new SMSF should know that if we want to discuss your application in more detail we’ll ring and talk to you in person.
Technology comes in many forms and while we all have different levels of ability and access, what's important is to take those first steps to embrace its advantages. So let me illustrate some basic first steps you can take.
I think we all agree that SMSF trustees need to keep up to date with their sector. For this reason we produce a monthly online newsletter, SMSF News, to provide the latest news, updates and features on what’s happening in the industry. But although there are 1.1 million SMSF members, we have only 35,000 email subscriptions. In light of this, in the near future we’ll begin autosubscribing SMSFs to the newsletter. And of course we'll also continue to improve the content. As always, we welcome your feedback.
We also recognise the SMSF sector has a relatively high dependence on SMSF administration software. The recent natural disasters have been devastating in this regard, with widespread implications, and potentially more to come. In terms of technology, and as a driver for change, it’s worth considering how you can mitigate the risk of losing hard copy business and investment records by embracing technology or SMSF or accounting software.
We’re also constantly looking at how we can use technology to streamline our processes and make things that are safer and provide more control for the individual. Going forward, we want to ensure our decisions are evidence based, drawing on data and industry insights. We’re also exploring the use of automation and artificial intelligence to support the use of data, analytics and tools to improve the client experience and provide more seamless services.
At the core of any enhanced data and analytics is protecting privacy and remaining vigilant about cyber security. This is why we’ve been working to protect the ATO from cyber-attack, fraud and identity breaches.
SMSF statistics
One way to assist good decision-making is to analyse SMSF statistics. There has never been greater interest in data insights into performance and trends across the SMSF sector. We’ve always sought to make statistics available, drawing primarily on the SMSF annual return (SAR). Sharing data sourced from SARs isn't new. We’ve been doing this in various forms since at least 2011 as part of seeking to support informed decision-making and to see comparative trends and performance.
Every year, since 2011, we’ve released a broad range of statistics as part of our quarterly and annual reporting of SMSF statistics and analysis to the public. And every year since, based on feedback, we’ve sought to improve and mature our SMSF statistical reporting.
More recently, we became aware of the interest in the costs of operating an SMSF, as well as the size and spread of SMSF balances, as a result of ATO data being used as part of the APRA fact sheet release in October 2019 (we had released this data in May 2019).
In terms of data improvement and providing more context to some of the statistics, I can advise that we’ll soon be publishing our statistical report for 2017–18. It will provide further context of expense data, both the unavoidable operating expenses such as management and administration costs and auditing fees, and the more discretionary expenses associated with interest and insurance.
Cyber security
Australians are often required to prove their identity as they work, buy, sell, consume and invest. The digitisation of our lives has brought with it enormous benefits and will continue to do so.
We have more choice than ever before and access to much more information. Many markets are more competitive. Our economy is more efficient and dynamic. The ability of individuals and businesses to prove their identity is the currency which grants access to this digital revolution. But unfortunately, cyber criminals have begun to leverage these technologies, with identity crime becoming increasingly prevalent. As an agency, we’re constantly protecting the important information we’re entrusted with; we take this very seriously. The threat to cyber security is a reality for all of us and the first line of defence is what people, including SMSFs, are doing to play their part in protecting themselves from risk.
We’ve been focused on the stability and resilience of our systems and, more recently, decommissioning AUSkey and Manage ABN Connections (MAC) on 31 March 2020. These will be replaced with myGovID which will give authorised users a secure, simple and flexible alternative for accessing our online services.
At the core of any enhanced data and analytics is protecting data, privacy and increasing cyber security. That’s why the ATO has been working to protect itself from cyberattack, fraud and identity breaches. Some of you may remember the days when we’d leave our front doors unlocked; this is no longer a common practice. Perhaps the contemporary analogy is, ‘Would you leave the electronic front door to your business or your fund open? Is your door strong enough to protect you? And how do you know?’
In our role as regulator, we continue to introduce new safeguards to help protect your retirement savings. In the past 12 months we've enabled greater visibility of SMSF member and individual super account information across the sector. This has been achieved through the use of digital services and new technologies and is part of a strategy to provide people with the ability to manage their complete super portfolio.
This month we released an SMSF alert service which will advise you when changes are made to your SMSF information. It’s designed to protect SMSF trustees and their retirement savings. We will advise you via email and/or text message when there’s been a change to a financial institution account details; electronic service address and authorised contact. We know from our intelligence that criminals will often change a person’s details in an attempt to take over their identity to get access to their retirement savings. Therefore, issuing these alerts so trustees know when their details have been changed is crucial.
In the latter part of the 2021 financial year, we will implement electronic release authorities to provide a faster, more contemporary channel to send and receive releases, replacing the current paper channel. Finally, long awaited electronic functionality, built on SuperStream, will be available for SMSFs to roll over money from APRA funds to their SMSF, providing a faster, more contemporary channel for rollovers. Both services are on track for a compliance date of 31 March 2021.
We’ll continue to find ways to innovate and use technology to help you manage your affairs safely and with confidence.
Real time reporting and data
Since the introduction of event-based reporting on 1 July 2018, some in the SMSF sector have expressed views that there are significant timing disadvantages now evident from the lack of alignment with APRA fund member reporting. Some SMSF members have been surprised when they were issued with an excess transfer balance tax determination for exceeding their transfer balance cap. Of course we’re aware there are various views on how to address this - for some, it’s more frequent data from the SMSF; for others, the ATO should give direct access to SMSFs. The exchange of data (often referred to as machine-to-machine) and information sources is not easy and, however we proceed, it won't happen overnight. It requires a lot of planning and design time.
In any event, there is now a greater acceptance that event-based type reporting or real time visibility has a place in the super system. It can be seen as a consequence of the importance of account balances being tracked and actively managed. While we've all learnt a lot since 2017, there's still a long way to go.
In a commercial setting, vendors are seeing the value in SMSF administrators and SMSF software providers who have a range of available automated functionality to be able report, and if required, to report on transfer balance cap type information for their clients. This is pleasing.
I noted the feedback on reducing the number of reporting and threshold tests, as well as a desire for more timely information from us, in the SMSFA’s 2020 Budget submission. But at this time, we’re a fair way from this being possible for SMSFs, given the system and cyber security pressures I’ve outlined. Nevertheless, we do appreciate your views and are keen to keep the dialogue open; however change of any magnitude requires time and careful consideration.
At the moment we’re focused on SMSF rollovers which have been highly demanded by SMSFs for many years and, as I've mentioned, providing improved SMSF statistics. All I can say for now is that we’re always open to your suggestions for change and improvements for the future.
Areas of interest for SMSFs
There is at times a focus on advice we give or actions we take where we comment on matters of emerging concern to us. In context, this is a small part of the overall picture of our engagement with SMSFs. On the whole, the performance of SMSFs is strong and positive and there’s a high level of regulatory conformance by the sector.
The vast majority of SMSFs never hear from us other than to support them and keep them up to date. With over 85 – 90 % of new registrations being approved without unnecessary delay, and a relatively small number going to audit, it’s clear that we don’t intervene unnecessarily.
The vast majority of SMSF trustees hold themselves, with the support of their advisers, to the required standard of being a regulated but self-managed super fund. Fewer than 2% of SMSFs have an auditor contravention report made to the ATO by their SMSF auditor and we take serious regulatory action against fewer than 500 trustees in any given year.
We recently sought to increase awareness in relation to investment strategies, supporting our communication with SMSF statistics, to inform and advise people of our view. This is necessary risk management; we wanted to bring certain matters in relation to investment strategy to your attention now, rather than when it may be too late. Our aim is to ensure that if you find yourself in, or are likely to deal with these matters, you’re aware of situations that may place you in an awkward and inescapable position or attract our regulatory attention.
I do appreciate our communication was read in different ways. However I don’t apologise for raising the issue of investment strategies or other matters in recent months. Indeed I’d like to think people prefer to hear from us before rather than after an event. This remains our position. With goodwill, we’ll continue to try to improve our communication but also to bring matters to your attention, even if they’re not overly popular. Just a couple of days ago we released further advice and considerations for managing your SMSF investment strategy. We consider it ‘best practice’ advice.
We don’t want to interfere with what you invest in but we do want to point out that you should have an investment strategy that can be seen and understood and reviewed in appropriate circumstances. It’s totally appropriate to share our views and provide guidance – even if not to universal agreement.
We’re also planning to publish additional guidance on SMSFs and property development through our next Regulator’s Bulletin; an update on our approach to the SMSF penalty framework and ongoing reports to you on our results and how action by us can be avoided.
Running an SMSF is not a responsibility to take lightly.
SMSF new registrant reviews and potential illegal early release
In 2018–19, about 10% of new registrants were identified by our ‘secure front door’ as high-risk registrations. More recently this percentage has increased. The purpose of the SMSF new registration review program is to ensure only those trustees who are genuinely focused on saving for their retirement enter the sector and to prevent potential fraudulent access of members’ super by third parties. We do this by risk assessing all members of a new SMSF and all new members added to an existing SMSF. Importantly, the process doesn’t test or validate the financial advice trustees have received from their tax agent or adviser.
We review trustees and their SMSFs when there are issues with previous compliance behaviour and history that may indicate the trustee is not capable, fit and proper, with requisite knowledge, to operate an SMSF, nor demonstrate an understanding of the obligations for using or accessing SMSF assets. Of course we also review SMSFs where data indicate potential identity fraud.
Withdrawing your super early unless you meet a condition of release is illegal. Generally, you can only withdraw your super when you reach retirement.
We recognise that actions which amount to illegal early release may be accidental, influenced by others or intentionally done. However, the breach and penalty is the responsibility of the SMSF trustee. Can anyone, in good conscience agree this should not be the case?
An understanding of trustee obligations and relevant trustee due diligence is central to knowing when and how assets can be moved in and out of the super system. If you’re not aware of this limitation from the start, you may accidentally or inappropriately access or use super from your SMSF.
As part of our review, and without wishing to overstate it, we still get people who register an SMSF who have been undisclosed bankrupts or have criminal convictions. We also still get people who don’t know why they want an SMSF. During our reviews, we've heard reasons such as: ‘My tax agent said’, ‘Everyone else has one’, ‘Because I want to buy a house, take a holiday’, ‘I saw an ad on TV’.
More directly, after an SMSF is established we've also seen amounts withdrawn from a person’s APRA fund which is then not reported to us as part of the SMSF annual return. This may be explicable and appropriate but it also attracts our attention. The lodgment of an SMSF return enables us to consider the matter.
We're acting to shut down promoters who tell people they can access their super, before they’re eligible, by setting up an SMSF. Last year we took action against an individual in the Federal Court for their role as a promoter and facilitator of an IER scheme. The court shut down the promoter, imposing a $220,000 penalty and a seven-year ban on establishing SMSFs We’re doing this to protect the retirement savings of people but also to protect the reputation of the sector.
Be assured, it will attract out attention if we see within the SMSF non-lodgment population a withdrawal from an APRA fund and then no lodgment by the SMSF.
Pattern of SMSF lodgment
People may choose to operate a regulated SMSF but then fail one of the key obligations which ensures the transparency of their operation; lodging the SMSF’s first annual return is the first demonstration of acting in good faith.
We take action through the Super Fund Look up Service (SFLU). Simply put, you won’t have a problem with SFLU if you lodge; if you contact us for a deferred due date you also won’t have an issue. However, not engaging is not helpful to anyone. I acknowledge there are reasons and circumstances that may impact our lives, particularly in relation to events that have a ‘due date'. When this does occur, it’s important to let us know why you need more time and more likely than not, we will grant it.
If we could see changes in relation to the level of non-lodgment rates, we would all benefit from the better data and more predictive insights across the super system, and put emerging trends and risks in context. More broadly, lodging is not about the action; it’s about an SMSF trustee fulfilling their key regulatory obligation to report and confirm how and why they've treated or transferred super through their SMSF.
You would and should expect us to act to bring the non-lodging population to the same standard the majority of SMSFs hold themselves to by lodging and reporting as required by law. We’re particularly concerned about the 24,000 SMSFs who have never lodged a return as most have had a reduction in their APRA balance and this is highly correlated with illegal release.
As part of our ongoing program in relation to lodgment we’ve alerted funds with overdue lodgments (on a blue branded ATO letter) and asked them to lodge or contact us for assistance. We’re now writing to those SMSFs who didn’t respond to the first reminder (on an orange branded ATO letter) alerting them if they fail to lodge we will seek to impose a failure to lodge penalty and may also seek to apply an administrative penalty under the super laws. Should these SMSFs still fail to engage with us we'll issue a final warning which will inform the trustee that the next step will be to issue a ‘notice of non-compliance’.
These letters or contacts are an opportunity to seek a ‘show cause’ explanation and advise there are potential penalties. We won’t be applying penalties for now but we are moving close to applying a penalty for those who ignore our engagement.
Conclusion
We're in a complex and changing environment. Things take time to settle and also many things take time to design, implement and understand.
Today, I’ve outlined where the ATO is up to as we enter 2020. I hope I’ve given you a sense of where we see the future.
In closing, I want to make some observations that may not be new as such but are as true as ever:
- trustees need to support and educate themselves and be aware they have investment opportunities through an SMSF but also obligations. We want to help you succeed
- if in doubt, seek advice; be it from the ATO or your adviser. The level of governance or ‘fit for purpose’ due diligence you’re prepared to accept is your judgment. But we're here to help
- if you make a mistake, come forward or the consequences will grow. We have discretion on some matters but your early engagement is key
- we encourage people to seek suitable software support to ensure accuracy, analysis and comfort to support their decisions. The time is now.
- we all want SMSFs to succeed.
Thank you.
Presentation by James O'Halloran, Deputy Commissioner, Superannuation and Employer Obligations, to the SMSF Association 2020 Annual Conference.