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  • Issues affecting SMSFs: the ATO perspective

    5th Annual 2013 SISFA SMSF Forum

    Thursday 17 October 2013

    Melbourne Marriott Hotel

    Matthew Bambrick, Assistant Commissioner, Superannuation

    ‘Issues affecting SMSFs: the ATO perspective’

    9.15 – 10.00 am


    Thank you for inviting me to speak today.

    First I thought I would give a, if you like, report card on the SMSF sector from the ATO point of view. Then I will talk about the issues we will focus on for our compliance activities over the coming year, as well as touching on some other issues of concern to us. And I will also run through some of the help and assistance we offer SMSF professionals and trustees.

    So, first: the report card. And by that I mean a few things around what our statistics are telling us about the growth and shape of the SMSF sector.

    Report card

    During the past four years the number of SMSFs has grown rapidly. As at the end of June 2013, there were just over an estimated 509,000 funds, an increase of about 40,000 funds in one year alone.

    Assets under management have grown to approximately $506 billion, holding steady at about a third of the now around $1.6 trillion in assets held in Australian superannuation.

    The establishment of new funds has far outpaced wind ups. Of SMSFs established in the 10 years to June 2011, 90% are still operating.

    The number of people who are members of SMSFs is approaching one million [963,852], or about 8% of the 11.6 million members of Australian super funds.

    About one million Australians changed super funds last year and 6% of those moved to an SMSF. Commenting on this trend, one analyst said, ‘It’s a one-way valve. Once members start an SMSF, they rarely ever go back’.

    While on average SMSF members have tended to be older than members of APRA-regulated funds, there has been a recent trend to members of new SMSFs being younger than the general SMSF member population. In other words, while most members of SMSFs are over 45, there are increasing numbers of new members who are between 25 and 44, with slightly more women in that younger age group. It’s only an early and new trend, but still, interesting to see where it goes.

    Members of SMSFs also generally have both higher average balances and higher average taxable incomes than other super fund members. Return on SMSF assets in 2011 was 7.7%, almost the same as the 7.8% return on assets for APRA-regulated funds.

    The increasing popularity of SMSFs has also brought more public commentary, including questions about of the health of the sector. But with every fund required to be audited annually by an approved auditor and those auditors only lodging auditor contravention reports with us for about 2% of funds each year, we think the sector is in pretty good shape. However, we are concerned that the number of funds that lodge their annual return late –something I’ll cover later – might indicate there are some issues.

    The resilience of the SMSF sector is also in part shown by how well it weathered the storm of the Global Financial Crisis. While our stats show the SMSF sector as a whole had negative return on assets during that period, APRA-regulated funds as a whole had slightly larger negative returns. Our stats also show the SMSF sector recovered in the following two years with positive returns in 2010 and 2011, almost the same as APRA funds.

    We also saw continuing growth, albeit at a slower rate, in the number of SMSFs during the GFC, with a return to the higher rates of growth afterwards. From 2009 to 2013 the numbers of SMSFs grew by 27%, from just under 400,000 to the estimated 509,000 I mentioned earlier.

    And that’s pretty much all the stats I wanted to mention, for now.

    If you’re interested in more of this information, check the quarterly and annual statistics we publish on our website. The statistical report for the 20-11-12 year should be published on our website in December.

    ATO compliance activities 2013-14

    While all of the statistics I’ve discussed show the SMSF sector is in pretty good shape overall, there are always a few issues.

    At a general level, what concerns us, as the regulator of SMSFs, are the following:

    • we worry about trustees or SMSF professionals who fail to understand their obligations
    • we worry about trustees who fail to comply with their obligations, including lodging their annual return
    • we worry about approved SMSF auditors who don’t audit funds properly or don’t report contraventions to us
    • we worry about SMSFs being deliberately misused, such as being set up for illegal early release or the money in the fund being accessed early, before a condition of release is met, or the SMSF being used for tax avoidance.

    Now, before I get into what we’re doing about the things that worry us, I do want to emphasise that the very large majority of people willingly meet their obligations. And we’ll continue to help them to do that so we can concentrate on those who don’t comply, whether deliberately or in error.

    And I also want to emphasise that, to the extent we can within the limits of the law, we respond differently to non-compliance depending on what rules have been breached and the behaviours we see.

    So, what are we doing this year:

    • we are focusing on engaging with new trustees to ensure they can operate their SMSF and are not seeking illegal early access to their retirement benefits
    • we are focusing on ensuring annual returns are lodged, and lodged on time
    • for new funds, we are also focusing on whether they are entitled to receive their notice of compliance
    • we’re reviewing irregularities in exempt current pension income and non arm's-length transactions
    • re-reporting of contributions and compliance with excess contributions tax release authorities will also have some of our attention
    • and this year we will be looking more closely at every fund reported to us by approved SMSF auditors. We want to make those trustees more fully aware of their obligations and ensure the contraventions are dealt with appropriately.

    We’re all fortunate that every fund must be independently audited annually for regulatory compliance, and reportable contraventions must be reported to the ATO. This independent audit is a critical factor in the ongoing concessional tax treatment of SMSFs, satisfying the government and the community that SMSFs are meeting their obligations. These audits also inform the ATO about SMSFs at risk and allow us to be on the front foot in engaging with them.

    As I mentioned earlier, over the past few years, the proportion of SMSFs reported to us by approved auditors has remained fairly stable at about 2%. However, in the last year (2012-13) there was a drop in the number of funds reported to us. We’d like to think this is because the levels of understanding and compliance in the sector have improved, but it may also simply be due to a time lag with data and we’ll get an increase later, or it could be that there has been a decrease in the effectiveness of SMSF audits. I think the latter is least likely and certainly hope it’s the first option: that understanding and compliance have improved. However, given the importance of these audits and the reporting of contraventions we’ll be looking to analyse the reasons for the decrease and take action if necessary.

    We also review the compliance and effectiveness of approved auditors. Now that approved auditors have to be registered with ASIC it will be the ATO and ASIC together who will be keeping an eye on approved auditors. I’ll talk more about this a bit later. First, I’m going to talk a bit about trustees and compliance.

    So, what do we find when we look at trustee compliance? In the main, trustees are attempting to comply with their obligations and are doing so successfully.

    However, we do find worrying numbers of trustees who have little or no idea about their obligations and who appear to have assumed that their tax agent or accountant will take all responsibility. While many advisors and tax agents will ensure that trustees meet their obligations, it’s important for trustees to recognise that they themselves are the ones who are accountable.

    We also find reasonable numbers of trustees who don’t fully understand aspects of their obligations and this has led to them reporting incorrectly on their SMSF annual return or having a contravention reported to us by their approved auditor.

    And we find smaller numbers of trustees who appear to be taking inappropriate actions without any attempt to comply or even intending not to comply. Obviously these are the cases where we take the firmest action.

    So, are there any particular areas where we commonly see problems? Yes there are. And when I say common problems, I mean among the minority, and it is a small minority, of funds where there actually is a problem. So, to discuss these problem areas:


    • Exempt current pension income. This is a major tax concession for funds available during pension phase. It allows income earned by the fund that supports a pension to be free from income tax. As more SMSFs convert to pension phase we expect to see more and more income exempt from tax. However, we’ve found that many trustees are failing to calculate it correctly. Especially with carry-forward losses and apportioning of expenses. So that’s something to be careful about.
    • While I’m on the subject of exempt current pension income, in January, we published a Q&A document – ) – on our website to highlight the conditions that must be met to allow an SMSF paying an accountbased pension to continue to claim exempt current pension income where the minimum pension payments haven’t been met. I encourage you to take a look at this, if you haven’t already, especially if you’re a trustee of a fund paying a pension. Trustees should also ensure they at least pay the minimum pension, or income supporting the pension is not exempt.


    The second common problem is about non-arm’s length income, or NALI. Some funds do not report NALI correctly and do not pay the correct amount of tax. Our Taxation Ruling 2006/7 sets out our view of what is NALI and there have been recent court decisions supporting our views on these special income issues.

    Related party transactions

    The last common problem I’ll mention is that of trustees investing in, or transacting with, related parties in breach of the rules. This can be by providing a loan or other financial assistance to a member or relative. This is prohibited. Further, it is also common when there is ’loan’ to a member that it doesn’t meet the characteristics of a genuine loan anyway, and in fact the member is accessing their super before they are entitled to. This can result in a very adverse tax outcome. The breaches most commonly reported to us by SMSF auditors are breaches of the lending or financial assistance rules and the in-house asset rules.

    In addition to these common problems areas, another of our focuses this year is on lodgment of the SMSF annual return.


    One of the key trustee obligations which we’re concerned about this year is lodgment of the SMSF annual return which reports on the fund’s regulatory and income tax obligations. We consider that timely lodgment is a clear indicator of how well a fund is run. This is for a couple of reasons. Firstly, to be able to lodge the annual return the fund has to have been audited. As I mentioned earlier, the annual independent audit by an approved auditor is a key regulatory requirement. Failure to lodge a return suggests the fund is not being audited. This in turn makes one wonder what the fund has to hide that it does not want reported. Also, if a fund can’t get through the task of doing its annual return, one wonders what else it is failing to do in accordance with the law.

    Hence, we rate failure to lodge or extended delays in lodging as indicating a higher risk of non-compliant behaviour.

    This year we are planning to get tougher with poor lodgers. All SMSFs with two or more years of overdue lodgments will have their regulation details removed from Super Fund Lookup. APRA funds generally won’t allow a rollover of benefits to an SMSF if its regulation details have been removed from Super Fund Lookup. Some employers also check Super Fund Lookup before they will make a contribution to a fund. And we will keep regulation details off Super Fund Lookup until the SMSF’s lodgments are up to date, potentially affecting rollovers and employer contributions. We’re also reviewing about 18,000 funds which have either continually failed to lodge or we believe are inactive. We will encourage these funds to wind up.

    We also recognise that poor lodgment behaviour can start early, so we’re working even more closely with newly registered SMSFs to make sure they understand their obligations and encouraging on-time lodgment from their first return. We’re also tightening up our processes that allow for a ‘return not necessary’ indicator so that we limit these to the first income year of an SMSF’s existence only. If an SMSF hasn’t lodged in its first year and doesn’t need to lodge in the second year this at first look suggests that there may not even be an SMSF operating; we will cancel their registration if the SMSF has not started operations.

    I think that’s enough about return forms.

    SMSFs and tax avoidance

    Earlier I said that one area of concern to us is that SMSFs are sometimes used for tax avoidance. I’ll briefly mention some of the schemes we’ve seen in the past year or so.

    • One scheme involved a share trading strategy to enable a taxpayer to access double the franking credits attached to fully franked dividends where the taxpayer effectively holds only one parcel of shares.
    • We also saw some new variations on the Dividend Access Share arrangement referred to in Taxpayer Alert 2012/4 and Draft Taxation Determination TD 2013/D5 involving the disposal of shares in a related private company with substantial retained profits and franking credits to an SMSF.
    • From time to time, we still come across the SMSF joint venture arrangement described in Taxpayer Alert 2009/16. That one tries to circumvent in-house asset rules by using related party agreements.
    • And lastly, we’re getting quite interested in arrangements involving holiday travel claimed as investment expenses by SMSF trustees.

    We put information about avoidance schemes on the tax planning part of our website. Recognising, rejecting and reporting suspect tax schemes is part of good citizenship.

    If you become aware of a scheme or suspect you are being asked to participate in one, you can contact us at or calling our schemes hotline [1800 177 006].

    Compliance close

    Before I move on from our compliance activities, I want to be clear that where trustees have committed less serious breaches in their obligations, we work with them to rectify and unwind transactions so that the fund can continue to operate legitimately. But in more serious cases we take firmer action, including imposing penalties, making funds non-complying (with the loss of concessional tax treatment), disqualification of trustees and prosecution.

    In the 2012-13 year we made 150 funds non-complying with the consequent loss of tax concessions, disqualified 440 people from being a trustee, wound up 70 funds and entered into 513 enforceable undertakings. This might sound like a lot, but that's out of 509,000 or so funds.

    We recognise the impact on people of these firmer actions. That’s why we usually prefer to work with trustees to rectify contraventions wherever appropriate and within the constraints of the law.

    The ATO approach to assisting SMSFs

    And this is also why education is so important. Knowing your obligations is the first step to complying with your obligations. This is why we work with the SMSF profession and trustee organisations to try to ensure knowledgeable professionals and trustees.

    Because things change, we recommend trustees and professionals regularly check our website and publications.

    Our free quarterly publication SMSF News, which now has over 30,000 subscribers, will also help you to keep up to date with change in the sector. If something important occurs, we can send an update outside the regular publication schedule to our subscribers. If you’re not already a subscriber, I commend it to you.

    We also seek to learn more about the needs of trustees and SMSF professionals through these subscribers and via focus groups.

    This year we added a new publication to our popular suite of SMSF lifecycle information. This one is called Paying benefits from a self-managed super fund and is intended for the growing number of trustees with members entering retirement phase. The lifecycle suite now covers events right through from thinking about setting up an SMSF to the retirement phase.

    As any time spent on the web shows, instructional videos are becoming an increasingly popular way to tell people about complex topics. As are phone and tablet apps. Even the Tax Office has produced a hit app – for Tax Time – this year. We’re currently looking at what we can do around videos and apps for super. Dare I say it? ... Watch this space.

    Trustees or their advisers can also write to us for further advice if they need to. We can provide written general guidance about the broad operation of the law, which often gives enough step-by-step information for many situations.

    If a trustee wants a written explanation of our view on how the super laws apply to their SMSF, they (or their authorised representative) can apply for SMSF-specific advice. While this advice isn't legally binding, it will provide certainty to trustees about the application of the super laws to their fund. If we later take the view that the law applies less favourably to an SMSF, the fact that trustees acted in accordance with our advice would be an important factor in their favour. Details of how to apply for SMSF-specific advice can be found on our website. You might wonder what people ask us. The most frequent questions relate to the following:

    • acquiring real property from related parties
    • the conditions for investing in related unit trusts so that they are excluded from in-house asset tests
    • what’s an improvement or repair of an asset for the limited recourse borrowing arrangement rules
    • what’s an acquisition from a related party for the purposes of those rules
    • whether you can use low-interest loans under the rules.

    And, in terms of assistance – for those with an interest in stats – as I mentioned earlier, we also publish annual and quarterly statistics about the SMSF sector.

    As you can see, we provide a range of products and services to help and educate SMSF professionals and trustees – and we’re always looking to make improvements.

    Approved auditors

    To change topics completely: I mentioned before that approved auditors now have to be registered with the Australian Securities and Investments Commission (ASIC). Currently there are about 7,300 approved auditors registered with ASIC, this is fewer than there were before this requirement was introduced.

    You must ensure that the auditor you use is registered as an approved SMSF auditor with ASIC. Check this early, especially as there are fewer approved auditors than there were. You can check this on the ASIC website (not the ATO website). Approved auditors now have an SMSF Auditor Number issued by ASIC which has to be included on the SMSF’s annual return lodged with the ATO. We will be checking this. And we will be checking that the number has been registered by ASIC. We won’t accept the return if there is no number or the number is incorrect.

    I talked before about the significance of the independent SMSF audit and of the important role approved auditors play in ensuring the integrity of the SMSF sector. Because of this, we will continue to focus on the compliance and skills of approved auditors. We’re working closely with ASIC on this and have already started working on cases where we’re concerned about the auditor’s compliance.

    Our aim is for all approved auditors to understand their obligations and the issues they need to consider when auditing an SMSF, to ensure they complete quality audits. To support this aim we provide the usual range of web and print content as well as specialist support. For example:

    • we're updating our guide on the Roles and responsibilities of approved auditors to provide even more detailed information. The guide discusses their responsibilities under the super legislation, the expectations of an SMSF audit and includes templates to assist in conducting an audit
    • we've also updated the ATO’s free audit tool, the electronic Superannuation Audit Tool, or eSAT. This tool is now a primary source of support and assistance for many auditors. eSAT helps auditors ensure they consider all relevant matters during an audit and keep proper records of the audit. eSAT has an extensive reference section covering the various regulatory obligations. eSAT also allows auditors to lodge contravention reports electronically directly with the ATO. Last quarter, half of all contravention reports were lodged through eSAT. You can download eSAT from our website. Go check it out if you’re an approved auditor
    • we're expanding our Super Professional 2 Professional service, an email-based technical support service. We’re expanding it from the 100 largest-scale SMSF approved auditors to the 300 largest scale SMSF approved auditors. This will cover about 40% of SMSFs.

    In addition to improved assistance for approved auditors and updating eSAT, we also undertake various compliance activities. We do things like analyse contravention report trends. We compare the results of our compliance activities with funds with the reporting from approved auditors. We risk assess all approved auditors based on all the data we have from both the SMSF and the more general tax side of things, along with other intelligence we receive. We use this kind of information to select auditors for detailed investigation. This can include reviewing a number of the audits they undertook to investigate their processes, documentation, decisions and findings.

    As for the funds, we think most auditors try to do the right thing and generally succeed. Again, as for the funds we look at, where we find issues that aren't critical or fraudulent we focus on providing support, assistance and education. For critical issues we take firmer action, referring the auditors to ASIC for disciplinary action and/or disqualification.

    The issues we’re most concerned about are:

    • lack of independence. We still find SMSF auditors who audit their own or relatives’ funds as well as auditors who audit funds for which they prepare the accounts and provide advice. This is not on
    • we’re also concerned about poor quality audit documentation. Proper documentation allows the ATO and ASIC to understand the process undertaken and the level of detail of the audit – where auditors can’t provide this evidence, or the evidence is incomplete, it raises concerns about the effectiveness, and sometimes the genuineness, of the audit
    • the final concern I’ll note, is about auditor knowledge or familiarity with their own and trustees’ obligations under the law. Our experience shows that approved auditors who undertake only a small number of SMSF audits may not be as aware as they should be of what obligations they are meant to be auditing. They are therefore more likely to perform ineffective audits.

    Over the past year or so we’ve been focussing our approved auditor work on education and support. From next year we will increase our focus on compliance monitoring, taking advantage of the fact that for the first time we will have a stable, known population of registered approved auditors.

    Before I move on, there is one more issue of concern to us – we have been seeing a few offerings of audits at prices that look too low. This makes us worry that a proper audit is not being done. There has also been some interest in offshoring audits. We have the same concern there. It’s something we’re looking at.

    That’s all I have to say about approved auditors.

    I’d like to touch on a few other points before wrapping up.


    The first point relates to investment fraud on trustees and their fund accounts. Given the size of the SMSF sector and the value of funds available – over $500 billion and counting – it’s an attractive target for fraud. Investment fraud tends to manifest in two ways:

    • fraudsters target SMSF trustees encouraging them to make poor quality or fraudulent investments. We’ve seen quite a few such instances and we’re concerned by the success that fraudsters continue to have. Even the most experienced and financially literate trustees have lost their money
    • the other approach is to persuade SMSF trustees to assign control of their bank accounts and investments to a third party who is ostensibly assisting them. These third parties then use the access either to ‘invest’ in assets that are found not to exist, or to just siphon off funds. Once again, it’s worrying how successful some of these activities are and the types of trustees affected, although this kind of fraud does generally appear to target less informed trustees.

    I mention this to make sure you are aware of the potential for fraud and keep it in mind when considering investment options. Of course, these are not the only ways fraud can be perpetrated on SMSFs.

    Limited recourse borrowing arrangements

    I’d also like to note the continued and considerable interest in limited recourse borrowing arrangements. We're working closely with the sector to ensure that arrangements entered into by SMSFs comply with the law. I encourage you to familiarise yourself with our Taxpayer Alert 2012/7 which warns SMSF trustees and advisers to exercise care with these arrangements and the use of related unit trusts. I also encourage you to check the rules as a first step in considering acquiring an asset under one of these arrangements because the arrangement has to be set up exactly right to be legal. Don’t wait to check the rules until after you’ve bought the asset – that can be too late.

    And while we’re on the subject, there has also been much recent attention given to purchasing property through SMSFs. All I’m going to add to that topic today is to repeat what I just said about making sure you set the arrangements up correctly and to say: be cautious; watch out for property spruikers; take the time to make sure the property is the right investment for your fund; make sure it fits with your existing investment strategy and if it doesn’t, take the time to revisit your investment strategy properly before deciding whether to buy the property. Don't get caught up in the moment.

    ASIC report and consultation paper on advice given to SMSFs

    Moving on. In April, ASIC released their report on improving the quality of advice given to SMSFs. In general, they found that the majority of advice provided was ‘adequate’, but not ‘good’. They said there was room for improvement in aspects of the process – particularly advice involving recommendations that investors set up an SMSF to gear into real property. The bottom line is: if you’re considering a limited recourse borrowing arrangement, don’t underestimate the complexity. ASIC has recently released their consultation paper with proposals to impose specific disclosure obligations on advisers. The paper also discusses running costs and viable asset size for SMSFs, with a report ASIC commissioned from the actuaries Rice Warner about this. If you’re an SMSF professional I recommend you go to ASIC’s website and read the consultation paper if you haven’t already.

    Regulations and ruling on starting and stopping an income stream (pension)

    The second-last topic I’d like to discuss is Taxation Ruling TR 2013/5 which is about when a superannuation income stream commences and ceases and the new regulations that came into effect on 4 June 2013 on point.

    The new regulations allow the income tax exemption for earnings that support pensions to continue after the death of a member in the pension phase until the deceased member's benefits are paid out. Death benefits will still be required to be paid out as soon as practicable after death and funds will not be able to keep benefits in the tax-free pension environment indefinitely. But it gives you time.

    Aging population

    The last thing I’d like to note relates to the increasing number of funds in pension phase, a factor related to our aging population. For many funds, the trustees may reach a point where they no longer have sufficient capacity to manage their SMSF. I encourage trustees, if you haven’t done so already, to think early about what you want to happen in those circumstances and set things up before that point is reached so that things are done the way you want them to be.

    And I encourage SMSF professionals, if you don’t already, to also encourage your clients to think about these matters and set things up the way they want sooner rather than later.


    So, I started this talk looking at statistics around the growth in the number of SMSFs, the number of members of SMSFs and the amount of assets managed through SMSFs. I noted that the figures, including this growth, generally painted a picture of a sector in good health.

    A robust, growing SMSF sector is a good result. But also, growing numbers means more rather than less vigilance from us and from SMSF professionals and trustees to ensure the continuing health of the sector. This continuing health, and being able to demonstrate it, are important factors in being able to ensure SMSFs continue to enjoy their reputation as a safe and appropriate place in which to entrust the retirement savings of a growing number of Australians. It is up to all of us, the ATO, SMSF professionals and SMSF trustees to work together to ensure that continues to be the case.

    Thank you.

    Last modified: 22 Oct 2013QC 26520