SMSF regulator update to the TIA

Justin Micale, Assistant Commissioner, Self Managed Super Funds Risk and Strategy
Speech delivered at the Tax Institute of Australia on 30 March 2023

Introduction

Thank you for the introduction, Liz and good morning, everyone.

It’s great to have this opportunity to share with you the latest insights into what we’re seeing in the self-managed super fund (SMSF) sector.

Today I’m going to talk to you about our responsibilities as the regulator and about the important role we all play in helping maintain the integrity of the sector.

I’ll also cover what we’re finding from the demographic analysis we’re undertaking, and how this will drive our strategies going forward. This research will also help us to identify where we need to do more to help trustees get it right.

What the data tells us

SMSFs are an integral part of Australia’s super system with over 1.1 million members holding an estimated total asset value of just over $868 billion.

This means by asset value, SMSFs are the second largest fund type behind industry funds, who hold just over $1 trillion. I think this really highlights how important our sector is to the overall Australian superannuation system.

The data we regularly publish provides information about the health of the SMSF sector, including demographics, costs and asset allocations. It is primarily based on information we gather in annual returns, new registrations and auditor contravention reports (ACRs).

This data provides useful trends and information about the entire sector and is often utilised by prospective and existing trustees, policy makers and other stakeholders.

The investment performance data shouldn’t be used for comparative purposes with other types of funds. It simply facilitates an annual comparison of the performance of the SMSF sector as a whole.

Not only do our statistics and research show the sector continuing to grow, it also highlights it is made up of a diverse array of participants.

To better understand behaviours and inform our approaches, we are undertaking demographic analysis of the SMSF population. You might be interested to know our preliminary analysis indicates:

• around 45% of funds are linked to small businesses
• 25% are linked to private wealth groups, and
• the remaining 30% are connected to individuals not in business.

The analysis is ongoing but we can already see differences in the compliance behaviours for these segments.

For instance, we have found higher rates of non-lodgment and loans to related parties for those funds with members operating a small business. There also appears to be a higher proportion of individuals entering the system for the purpose of illegally accessing their super as this group tend to be targeted by promoters. Finally, inappropriate tax planning arrangements involving SMSFs are more common where fund members are part of a private wealth group.

Role as regulator – working with industry

The ATO’s role as the regulator of SMSFs is focussed on protecting the integrity of the system by ensuring funds pay the correct amount of tax and operate within the law, for the sole purpose of providing retirement benefits to their members.

This role is not a prudential one as members of the fund are also its trustees and as such are in a unique position to protect their own interests. It is why the word ‘self’ is such an important part of the SMSF equation.

They have direct access to their retirement savings, have greater flexibility and choice in investments, and are personally responsible for the actions of the fund so it is critical they go into this system with their eyes wide open.

To achieve this, we provide prospective and current trustees with access to information to make an informed decision about whether an SMSF is the best retirement savings vehicle for them. We only want them in the system if they are fully committed to meeting their obligations and running their own fund.

We know there are significant variances in the knowledge and capability of new and existing trustees in running their SMSF, and their ability to meet their obligations is directly related to this. It is a common theme coming from trustees who run into issues to tell us they didn’t understand the rules or the work it would take to run their fund.

This clearly has implications for you as they often leave the performance and operation of their fund to professionals. You have a critical role in helping us maintain the health of the sector by ensuring individuals enter and remain in the system for the right reasons.

It’s timely that the Australian Securities & Investments Commission (ASIC) has published their guidance product which highlights the important role financial advisers have when giving adviceExternal Link about whether an SMSF is suitable for their clientExternal Link.

Support for prospective and current trustees

As I just mentioned, we provide trustees with a range of products to help them understand their obligations and to support them throughout the lifecycle of their SMSF.

Trustees have told us the key to being successful was to be organised in relation to financial administration. We encourage you to share our SMSF guides with your clients to help them understand what to consider at different stages in managing their SMSF.

We don’t start to drive a car without reading the road rules and running an SMSF is no different. It requires skills, knowledge and time, so please make sure your clients have a good understanding of the rules and set themselves up for success.

For prospective and new trustees there’s our Starting a SMSF publication, with information on what’s required to set up an SMSF. For anyone who needs to know about what’s involved in ceasing their SMSF, we have released our Winding up a SMSF publication. The last in the series is the Running a SMSF publication which will be available soon.

Another support product we’ve recently released helps individuals understand when a member can legally access their super and warns against the dangers of promoters of schemes and identity theft. You can find the factsheet on Accessing your super early may be illegal.

Where clarification is required on particular issues, we will continue to provide the latest information on these topics on our website along with other support products such as videos, checklists and case studies.

I encourage you to share these with your clients as it can complement the support you provide.

What gets our attention?

For the next part of the presentation, I will talk to you about the risks we are most concerned about and give you an insight into what we are doing to address them.

The response we take is multi-faceted and is certainly not reliant on compliance actions alone.

While we continue to see the majority of trustees doing the right thing, we have ramped up our compliance actions as we have identified an increase in behaviours which put retirement savings at risk.

Let’s take a closer look at those areas we are paying particular attention to.

Identity fraud and investment scams

In the SMSF sector, identity fraud and investment scams are a top priority for us because even though instances are not common, the impact can be devastating with some victims losing all of their retirement savings.

Recent data breaches reinforce the need for us all to be extra vigilant. There is no doubt identity crime is increasing across the community and the SMSF sector is not immune.

Last year, we did see an increase in the number of individuals that were victims of identity fraud where:

• SMSFs were registered without their knowledge, and
• super was rolled into an account controlled by the fraudster.

Luckily for most, we detected the fraud early so we could protect their super, but not for all.

It’s vital your clients:

• know how to protect themselves from identity fraud, and
• never give personal details such as their drivers licence or tax file number to anyone they don’t know or trust.

We are working with other regulators such as ASIC and Australian Prudential Regulation Authority (APRA) to ensure there are a range of safeguards in place.

For instance, APRA has encouraged the funds it regulates to undertake additional proof of identity checks prior to rolling money over into an SMSF. I know this can be a point of frustration as it may delay the processing of these requests, but it is an important control.

The other type of fraud we see arises where scammers contact individuals and mislead them into:

• providing personal information
• setting up an SMSF, and / or
• investing in their bogus products.

These scammers are becoming increasingly sophisticated, impersonating well-known Australian companies and using personal details to gain trust.

They use various methods to contact people such as email or cold calling, pretending to be financial advisers and encouraging them to transfer their superannuation into a new SMSF or investment product. The investor is often promised high returns.

This reinforces the need for individuals and you as their advisers, to treat contact from any third parties in relation to their investment and superannuation choices with caution. I suppose it comes back to the old saying, if it sounds too good to be true it probably is!

It is important to remind your clients to check they’re dealing with a licenced financial adviser. They can check this on Moneysmart’s Financial advisers registerExternal Link.

A key protection measure we have deployed to address fraud and scams is to issue alerts via text and email when certain actions are initiated. Most importantly we send an alert when a rollover is requested, so if your client receives an alert and they're not aware of the request, they need to contact their super fund immediately to stop the rollover.

We also send alerts when a change of details is requested such as adding a new member to an SMSF or the SMSF bank account details are being changed. Your clients should contact the ATO immediately if they’re not aware of the activity.

This is why it’s vital you ensure your clients’ individual contact details such as their mobile number and email address are kept up to date with us, as this will ensure they receive our alerts and are notified of any fraudulent activity. This is just one example of why it’s important for your clients to get the basics right. I will cover more on this topic later.

A further measure we have implemented to disrupt fraudsters directing money to a bank account they control, is the removal of bank details from the ABN registration process. Trustees now need to provide their SMSFs bank details to the ATO via an authenticated channel such as our online services.

Finally, if you’re asked to register an SMSF for a new client make sure you verify their identity as we have seen some tax agents unwittingly caught up in registering fraudulent funds.

Strong client verification helps to protect tax practitioners and their clients from identity fraud.

Illegal early access

Illegal early access is the most common risk we see in the sector.

It occurs when individuals access their retirement savings before meeting a condition of release. Not only is this illegal but money taken out of superannuation early has a detrimental impact on an individual’s retirement nest egg.

As you know, there are restrictions on when you can access your super legally and only limited circumstances where a member can withdraw their super early.

Unfortunately, we are seeing an increasing number of trustees taking advantage of their direct access to their SMSF bank account and they are using this money to pay for items such as business debts and personal expenses.

Illegal early access plays out in 2 main ways.

Firstly, new registrants enter the system purely to illegally access their super.

This is often at the direction of promoters who in return for a high fee, enable these individuals to establish an SMSF, sometimes unwittingly with the help of a tax agent, and then they go on to withdraw their super before they are legally entitled to.

Once the money is rolled over from their APRA fund and then withdrawn from the SMSF bank account, these members abandon the fund and never lodge a return.

This behaviour appears to be on the rise as over the last 5 years we have seen a significant growth in SMSFs failing to lodge their first ever annual return.

Over 21% or around 5,400 of the 26,000 new funds that registered during the 2021 financial year have not lodged. There are also 36% of new funds that registered during the 2022 year that have not met their end of February lodgement deadline.

Secondly, we also know that existing trustees sometimes access their super early. In some instances, they will stop lodging to avoid detection or they do lodge but have a contravention reported to us.

What are we doing about IEA?

So what are we doing about this?

We have a strong focus on warning people not to be tempted to go down this path. And for those that don’t heed our warnings, ensuring there are consequences for their actions.

For instance, as I mentioned earlier, we recently published an illegal early release fact sheet which warns people of the consequences of accessing their superannuation before meeting a condition of release and what to do if contacted by a promoter.

We plan to heavily promote this product in the lead up to tax time and would appreciate any help you can provide in sharing this message.

As part of our new registrant program, we risk assess every individual entering the system and identify those that may be registering for the wrong reasons.

Over the last 18 months this program has protected about $200 million in retirement savings from leaving the super system illegally.

As a result of our scaled-up compliance actions, in the first half of this financial year, we have also disqualified almost 400 trustees and raised more than $10 million in extra tax, administrative penalties and tax shortfall penalties from amendments made to members’ personal tax returns.

We are also stepping up our focus on licenced and unlicenced promoters of illegal early access schemes and have a number of investigations underway. This behaviour is unacceptable particularly as we know promoters often target people who are in vulnerable communities and the financial impact on the victims can be substantial.

Our scrutiny of those engaging in promoter behaviours is intensive and often involves us exchanging information with a number of law enforcement agencies such as ASIC, the Tax Practitioners Board (TPB) and the state and federal police. The sanctions can be significant and include:

• the loss of professional licences
• significant penalties
• criminal prosecution.

For instance, you may have recently read about a case where 2 accountants were charged by the NSW Police Force for allegedly using SMSFs to misappropriate $3.5 million of their client’s retirement savings.

Your help with stamping out this type of behaviour is important, so please let us know if you come across anyone promoting schemes involving SMSFs.

Lodgment of SMSF annual returns

Now I’m going to talk about issues relating to the lodgment of SMSF annual returns.

Lodgment is the most fundamental obligation for all trustees including those in retirement phase, which means non-lodgment is a key regulatory risk we’re focused on.

So why is lodgment so important? The SMSF annual return provides us with visibility of the:

• fund’s compliance with its regulatory and tax obligations, and
• super balances of its members.

Failure to meet this obligation may be an indicator of broader compliance issues including illegal early access.

The majority of 2021 annual returns have been received, and I’d like to thank you for supporting your clients with meeting this obligation.

There is however still a lot more work to do as there are around 45,000 overdue 2021 returns. These returns are now at least 9 months past their lodgement deadline.

There are also other SMSFs with outstanding prior year returns and of particular concern is the increasing number of funds failing to lodge their first annual return. Unfortunately, this population has grown significantly from 7% in 2016 to over 21% in 2021.

As I covered earlier, if these funds have received a rollover and not proceeded to lodge their first return, it is a key indicator of illegal early access.

Helping your clients meet the fundamental requirement to lodge their annual return on time is the first step in ensuring they understand and comply with their obligations.

For new trustees, all our research tells us it is critical for them to develop good compliance habits in the early stages of setting up an SMSF.

How do we tackle non-lodgment

So how are we tackling this?

As a first step to encourage compliance, we remind trustees of their lodgment requirements via articles and targeted mail outs. And whilst this does deliver positive results for the majority of trustees, there is a persistent group who continue to ignore our reminders.

For those that fail to meet these obligations, we remove their complying status on Super Fund LookupExternal Link which restricts the SMSF from receiving rollovers and employer contributions.

Then for the persistent group of non-lodgers with well overdue returns, we have deployed our 3 Strikes letter campaign.

I have spoken about this process before so won’t go over it in detail, but to provide you with an update, we have now disqualified about 150 trustees who failed to respond to a red letter.

We also have a specific focus on tax agents and auditors who have their own personal SMSF lodgment obligations outstanding.

I realise it is a busy industry, but we do hold professionals to a higher standard when it comes to meeting their tax and regulatory obligations.

We have issued red warning letters to this group and have commenced audits on those who have failed to respond.

If you have received one of these letters or are subject to an audit, you should take it seriously and act now. Because if you are disqualified it may have an impact on your professional reputation and registration.

As always, if you or your clients are experiencing difficulties, we encourage you to contact us so we can help. Coming to us first is always a better option than waiting for us to come to you.

Regulatory contraventions

Overall, the sector displays positive regulatory compliance, with around 97% of the lodging SMSF population having no reportable contraventions from their independent audit.

In the 2022 financial year, we received ACRs for around 14,000 funds with nearly 40,000 contraventions being reported. This is an increase of around 4% in the number of contraventions reported compared to the previous year.

Interestingly, over the last 5 years the number of SMSFs with ACRs reported has grown significantly from around 8,000 to 14,000.

The reasons for this increase could be as a result of a range of factors, primarily relating to the behaviours of trustees and their auditors. If we take a moment to think about trustee behaviour this takes us back to my earlier message that trustees need to understand the significant responsibility they’re taking on and that getting it wrong can have serious ramifications.

The increase in contraventions reported may also be a reflection of greater levels of auditor independence stemming from our approach to managing compliance to the revised code. I see this as positive outcome for the integrity of the sector.

Given what we have already discussed, I am sure you will not be surprised to hear the most common contravention relates to members incorrectly accessing their retirement savings early which is often reported as a loan to a member or a payment standard breach.

We take a risk-based approach in considering our response to reported breaches, taking into account factors such as the impact of the breach on the fund, the compliance history of the trustee and their attitude to meeting future regulatory obligations. As you would expect, we treat a simple mistake very differently from someone who shows a blatant disregard of the law.

As I mentioned earlier, in the first 6 months of this financial year, we scaled up our compliance actions and this has resulted in an increase in the number of:

• trustees disqualified
• personal tax assessments raised
• administrative penalties imposed.

These sanctions can have wide ranging impacts, as the disqualifications are published and trustees are personally liable for personal tax assessments and penalties imposed.

We also monitor SMSFs with large asset balances and high rates of growth and investigate situations where individuals seek to inappropriately access concessional tax rates for superannuation via the use of an SMSF.

The most common issues we identify involve situations where group structures have been utilised to channel income or assets to an SMSF in a way that seeks to circumvent contributions caps and other tax and regulatory rules.

We have dealt with cases involving the under-valuation of assets acquired from related parties, and income from property developments, private company dividends, unit trust distributions and personal services income being inappropriately diverted into the SMSF.

So what should your clients do if they go off track?

If you identify issues with your client’s affairs, it’s important for you to work with them to develop a rectification plan to help them get back on track.

Where a regulatory contravention is not able to be rectified it is important to bring this to our attention as soon as possible via our voluntary disclosure service.

To make a voluntary disclosure you need to complete our form. This form has recently been updated and now needs to be signed by at least one trustee to comply with the whistleblower laws.

We will then work with your client to find an appropriate resolution. Where a client is forthcoming and works with us, we will take this into account when considering penalties.

Further information about our voluntary disclosure service and a copy of the latest form is available on our website.

SMSF auditor independence and adequacy

The next risk I want to talk to you about relates to SMSF auditors.

The SMSF annual audit is founded on the process being independent and adequate. As you know, SMSF auditors provide a critical service in ensuring the validity and accuracy of an SMSFs financial statements and its compliance with super laws.

We continue to see the vast majority of auditors demonstrating a high level of competency and professionalism.

As part of our risk analysis, we do keep a close eye on the ever-changing population of SMSF auditors to help us pick up changes in their demographics so that we can best position our communication and compliance strategies.

For instance, we have observed that the age demographic is fairly evenly spread across the 40 to 70 year age group and around 68% are located in NSW and Victoria combined. The most common business model for auditors is to operate via a company with 45% using the structure and 33% electing to operate in an individual capacity.

In terms of overall numbers while we have noticed a steady reduction in the auditor population over the past 2 years, we know it has largely come from auditors who have not been active in providing audit services.

In the last year, since our approach to managing compliance with the changes to independence standards came into play, we have seen 31% of funds engage the services of a new auditor which is above the 20% churn we usually see from year to year.

It is pleasing to see this appears to have had a positive impact on the quality of the audit process as we have seen a rise in contravention reporting, rectification plans and voluntary disclosures particularly from trustees with new auditors. These are all traits of a healthy system with timely engagement often preventing bigger issues from surfacing down the track.

Our primary focus for the SMSF auditor program is to preserve the strong relationships we have developed with the professionals in this industry. This is a key aspect of what we do as it allows us to stay abreast of core issues impacting the audit process and where appropriate provide support and guidance to assist.

This year we have worked with ASIC to reshape our compliance program for SMSF auditors. This is resulting in an expanded program with the introduction of a broader range of differentiated and more real time compliance actions being put in place.

We will continue to use data and intelligence to risk assess and deal with higher risk firms, focusing on behaviours such as audit adequacy, in-house audits and reciprocal auditing arrangements.

We are expecting this revised program to deliver a higher rate of referral to ASIC in the coming financial year and, as a result, increased visibility on how both agencies are working effectively as co-regulators to address inappropriate auditor behaviours.

The most recent media release from ASIC confirms they have taken action against 5 auditors with various sanctions being imposed including disqualifications and the cancellation of registrations.

The common issues we have identified in our referrals to ASIC include:

• failing to obtain sufficient appropriate audit evidence
• inadequate evaluation of the audit evidence
• inappropriate documentation to support the conclusions reached.

Documentation of an SMSF audit is necessary to determine if the audit has been properly conducted. This is the case even if there were no contraventions.

Approved SMSF auditor – SAN misuse

Many of you would’ve heard me talk about our program of identifying SMSF auditor number misuse which we refer to as 'SAN misuse'.

This occurs where an approved SMSF auditor’s details have been entered incorrectly or an audit has not been undertaken.

This work relies heavily on auditors advising us of the audits they have completed by submitting an audit completion advice on Online services for business or by responding to our mailouts containing lists of funds which have quoted their auditor number.

Pleasingly, this partnership has led to a significant positive shift in the way SANs are being reported by tax agents and trustees on their annual returns.

We continue to work with auditors on this issue and in October last year we sent client lists for audits completed in the 2022 financial year so they could review the annual returns lodged where their SAN was quoted.

Most responses were received in mid-February 2023 and we have started to contact tax agents to ask them to review and if necessary, explain and rectify any incorrect reporting. Where appropriate, referrals will be made to the TPB for further action to be considered.

Over the last few years, the TPB has terminated the registration of a number of tax agents that deliberately misused a SAN and this is an important reminder of the significant sanctions that can apply in these circumstances.

Get the basics right – keeping details up to date

Now I want to talk to you about an area we need your help with. We have noticed a growing trend in SMSF trustees not getting the basics right.

So for the next part of my presentation, I will focus on why it is so important for trustees to stay on top of a number of basic administrative obligations.

Let’s start with the most basic requirement of all, keeping your client’s contact details up to date.

I know this sounds incredibly simple, but we often see trustees running into difficulties because they are not receiving our messages and reminders.

When your clients don’t keep their contact details up to date, the types of important messages they won’t receive include:

• our registration letters, which provide useful information about managing an SMSF
• the fraud alerts I mentioned earlier, that can help prevent someone’s super from being stolen, and
• the lodgment reminder letters we send, advising of the consequences of non-lodgment.

Then for funds with a corporate trustee structure, they won’t receive their annual ASIC fee reminder if they don’t keep their details up to date with ASIC. This will most likely result in the deregistration of the corporate trustee which means they will no longer have the right to deal with, invest, or enter into transactions for the SMSF. Unwinding this is possible but it can be time consuming and costly.

Get the basics right – ESA and unique bank account

Something else we’ve seen, is trustees neglecting to either get an electronic service address (ESA) or they forget to renew their ESA which means it can become inactive. Combine this with trustees who don’t obtain a unique bank account for their fund and it’s a recipe for a rollover disaster.

An inactive ESA can also mean you won’t receive our release authorities in situations where you may have Division 293 tax or excess contributions.

Most difficulties experienced by trustees in making a rollover into their SMSF are because the transferring fund is unable to verify details such as the SMSFs bank account and ESA. If there is a mismatch between the information provided on the request and the data the ATO holds, the transaction will not be approved.

We encourage your clients to update their ESA and unique bank account with us. It’s easy to do using Online services for business or over the phone.

We also have some useful tips on how to avoid delays when using SuperStream to roll over your super on our website.

Get the basics right – director ID

Another key component of getting the basics right for those funds with a corporate trustee structure is for them to have a director ID.

Applying for a director ID should be a part of the steps your clients take in establishing their corporate trustee before they register their SMSF.

New directors are required to apply for their director ID prior to their appointment. If they don’t do this and we pick them up as part of our registration review process, we won’t allow the fund to be registered.

There are around 700,000 directors within the SMSF sector and 100,000 of these directors are yet to apply. While the deadline has passed, directors can still apply and the fastest way to do this is to via the Australian Business Registry ServicesExternal Link website.

Directors must lodge their own application as they are required to verify their identity. Authorised tax agents and other intermediaries are unable to apply on their behalf.

Get the basics right – financial administration

Financial administration is another basic requirement for trustees and there can be significant impacts to their fund and their members if they don’t stay on top of this.

For the timely lodgment of the SMSF annual return, it is crucial for trustees to:

• value their assets at their market value each year, and
• appoint an approved auditor no later than 45 days before the due date.

It’s not just annual returns that have to be lodged though and with July fast approaching it’s timely that I mention the change coming soon regarding the frequency of reporting for transfer balance account events.

From 1 July 2023, the transfer balance account report (TBAR) reporting due dates will be streamlined which means all events must be reported 28 days after the quarter the event occurred.

It is important for you to identify clients impacted by this change and to encourage them to report these events as soon as practical. This will ensure the correct personal transfer balance cap information is displayed on ATO online services and will help them avoid getting into an excess cap situation.

Another fundamental obligation for trustees is to regularly consider whether the fund’s investment strategy remains appropriate in meeting members’ needs and consistent with their investment objectives and retirement goals. This regular review benefits members and is also a legal obligation for trustees.

Get the basics right – winding up

It is also important to finalise all reporting and wind up the fund when it reaches the stage where it’s no longer operating.

We see a number of funds that remain registered in the system but are no longer holding any assets and have not been wound up. There are also others that have been registered but the trustees have chosen not to proceed down this path.

If your clients don’t wind up these funds, they may be drawn into our compliance actions which is clearly a waste of time and resources for all of us.

As I previously mentioned, we now have a helpful resource in the Winding up a SMSF publication to assist your clients.

Support and guidance – NALE

And of course it would be remiss of me not to mention the hottest topic in the industry for the last few years being non-arm’s length expenditure (NALE).

That said, there’s not a lot more I can say because as you know the federal government is currently considering its response to the consultation process.

This process seeks to address the significant tax consequences that may arise where non-arm’s length expenditure of a general nature arises.

I do want to reiterate that irrespective of this process, we believe trustees have been provided with sufficient opportunity and warning about the need to enter into all transactions on an arm’s length basis so we do not intend to extend our practical compliance guideline (PCG) beyond 30 June this year.

The PCG has never been about a different interpretation of the law it simply outlines our compliance approach to its administration.

The best advice you can provide to your clients is to pay particular attention to transactions involving related parties and ensure their arm’s length nature can be substantiated.

Conclusion

This brings me to the end of my presentation today. Thank you for attending and for the ongoing support you provide to participants in the sector.

As I stated at the start, SMSFs are an integral part of the super system in Australia.

And I’d like to wrap up by highlighting how important it is that you support your clients in getting the basics right! Put simply if someone has decided to sign up to starting an SMSF then it is not unreasonable to expect them to meet basic obligations like:

• lodging forms on time, and
• keeping their contact details up to date.

The consequences of not doing so can be significant.

To maintain trust and confidence in the sector, it is critical for us to work together to ensure people enter the system for the right reasons and participate in it correctly.

Speech delivered by Assistant Commissioner, Justin Micale to the Tax Institute of Australia on 30 March 2023.