Show download pdf controls
  • Self-managed superannuation funds: self-managed but supported

    James O’Halloran, Deputy Commissioner, Superannuation, ATO

    Keynote address to the SMSF Expo 2018

    Friday 27 April, Melbourne Convention and Exhibition Centre

    Check against delivery

    Introduction

    It is a pleasure to be here at the SMSF Expo today and to share the stage with John Maroney, the CEO of the SMSF Association.

    SMSFs are a key part of Australia’s superannuation system and as the government regulator for SMSFs the ATO recognises how important it is to work with the sector, trustees, members and advisers.

    There are approximately 577,000 SMSFs with an estimated 1.1 million members. With total estimated SMSF assets reaching $721 billion, achieving an annual growth of 7.5 per cent, the segment is not insignificant by any measure.

    We continue to see good returns in the industry. As our analysis, released last week, shows, the sector achieved a quarterly growth of 3.1 per cent ($699.5 billion) for the period September to December 2017.

    SMSF trustees

    As SMSF trustees, you have made an important decision to take charge of your financial future in your retirement. This decision comes with some significant responsibilities, let alone its vital importance to your future.

    Of course we appreciate that the decision to operate an SMSF is often a very personal choice and one which is made for many reasons. However whatever the individual reasons may be, chief among them is the desire to self-manage and secure one’s financial future.

    It is true that the ATO’s role in the SMSF sector is that of regulator as well as tax administrator. This does mean that we are authorised to enforce the regulatory and tax compliance of SMSFs. However, our preference is to work with the sector, undertake early engagement with you and your advisers and provide certainty so we can prevent breaches before they occur.

    As supported by our own assessments, we do find that by far the majority of people in the sector seek to do the right thing and operate within the rules and regulations. We therefore recognise your significant contribution to the financial sector and the effort you make in planning to provide for your own financial security.

    Our primary focus is to support, enable and assist SMSF trustees and their advisers. We do this by providing a range of guidance, resources, tools and services that make managing the regulatory and tax aspects of your SMSF as easy and as painless as possible. Indeed, through the recent round of reforms to super we have sought to ‘live’ our values and demonstrate our commitment to engage, give early certainty on how the Commissioner will administer the law and provide practical support and services.

    For these reasons, good governance and practices are vital to enable you to operate your SMSF. And there are some ongoing truisms regarding best practice. These can be spoken about in different ways, but for today’s purposes, I’d like to share the key ones with you. They are perhaps obvious, but are nevertheless worth revisiting.

    Firstly, make sure you’re aware of your obligations as an SMSF trustee

    Stay informed about the fundamental rules and know the restrictions that apply to running your fund.

    Of course, this is not a task you need to do alone and you don’t need to be a superannuation expert. We seek to provide you with active support through good advice, services and, in some instances, a clear statement of what behaviour or action will attract our attention.

    However I don’t want to underplay the special responsibilities that come with being an SMSF trustee. You’re responsible for operating your fund within the law so you need to understand at least at a fundamental level what this means.

    It’s important that together we maintain the integrity of and credibility in the SMSF sector. It is through our collective actions that the reputation of SMSFs will be assessed by others.

    While the ATO can and does take enforcement action when people deliberately ignore their obligations, our preference is to apply a prevention rather than detection approach.

    Secondly, don’t think you can or should do everything on your own

    We strongly encourage self-education, but also consider engaging the services of a professional adviser who suits your circumstances. After all, the decisions you make are important life decisions in the context of your SMSF. This is especially important when you’re undertaking a new investment, when you’re considering making additional contributions to your fund and when you’re looking to start paying benefits from your fund.

    Thirdly, if despite all of your best intentions and efforts you make a mistake that inadvertently results in a compliance breach don’t bury your head in the sand

    Ignoring the issue won’t make it go away. By far the best thing you can do in these circumstances is to attempt to rectify the issue as soon as possible, including contacting the ATO.

    Common areas of ATO concern

    The Superannuation Industry (Supervision) Act 1993 (SISA) contains a number of regulatory rules with which super funds must comply.

    The sole-purpose test

    The sole-purpose test is a fundamental pillar of super fund regulation; it maintains that the investments of a super fund must be for the sole purpose of providing retirement and death benefits to members.

    The Commissioner considers that using fund assets to provide residential accommodation to a member or relative may contravene this test, even if the fund receives arm’s-length rent.

    Late last year, the Federal Court dismissed an application by the trustee of an SMSF challenging the Commissioner’s views on super regulatory provisions related to the sole-purpose test.

    The Federal Court held (inter alia) that leasing to a related party would cause the trustee of the super fund to contravene the sole-purpose test by using the assets of the fund for the collateral purpose of providing accommodation to a related party. The case has been appealed to the Full Federal Court, so I can’t say much more, but it will be an important matter to watch. The ATO will say more on this matter when it can.

    In-house asset rules

    Trustees also need to understand the in-house asset rules; a fund’s in-house assets cannot exceed five percent of their total assets. If you are unsure if an investment will be an in-house asset, seek independent advice or write to us.

    The most common regulatory breach we see in SMSFs relates to the fundamental rule that prohibits lending fund monies or assets to members or relatives of members of the fund

    Unlawful schemes and arrangements

    Another key part of our role is to warn the community when we see individuals seeking to take advantage of trustees and SMSF members. While we only see a very small number of such cases, there are instances where SMSF trustees are targeted as part of the promotion of unlawful schemes and arrangements. These approaches promise to deliver significant tax or financial benefits beyond those ordinarily available.

    Indeed these arrangements are complex and cleverly disguised and structured to appear as if they are legitimate. In fact they are illegal and can give rise to very serious consequences for both you and your fund.

    However, we also see other arrangements which seek to promote, incorrectly, that you can roll your future retirement savings out of your APRA-regulated retail or industry fund into an SMSF so you can withdraw it to use as a deposit on a house. These arrangements are illegal and you risk losing all your savings.

    For example, recently, we’ve seen the emergence of schemes and arrangements targeting SMSF members, particularly those approaching retirement. To this end, in November 2017 we updated our Super Scheme Smart program which was developed in 2016 to help individuals and their financial advisers understand and recognise retirement planning schemes that don’t comply with super and tax laws.

    Super Scheme Smart gives taxpayers access to relevant case studies and information packs to help them recognise illegal arrangements, explains the significant risks associated with these, highlights warning signs to look for and advises where to go for help.

    The last thing we want is for people’s hard-earned retirement savings to be put at risk by unscrupulous promoters. SMSF trustees and members need to be mindful of the regulatory and income tax risks that arise from particular planning arrangements, many of which may appear attractive in light of the new caps and limits that apply post-1 July 2017. The old adage stands true: if it seems too good to be true then it probably is!

    The ATO is here to support you

    We have recently created a new public advice and guidance product specifically for SMSF trustees and their advisers (SMSFRB). It provides targeted, timely updates about new or emerging super regulatory and income tax arrangements that pose potential compliance risks for the SMSF sector.

    Our first SMSF Regulator's Bulletin 2018/1 discussed our concerns and view on the use of reserves in SMSFs and the interplay with your TSB.

    To further support you and your adviser when you’re making key decisions we’ve also published a range of public guidance such as public rulings, tax determinations, law companion rulings and practical compliance guidelines. These outline the ATO’s position on a range of SMSF regulatory and tax matters.

    We seek to provide you with certainty about our position on a range of issues and you can rely on these products, which provide confidence from a regulatory and tax compliance perspective, when making important decisions in your fund.

    We also offer a range of SMSF information, guidance and tools designed to inform you and keep you up-to-date with the key things you need to know as an SMSF trustee. Available free of charge on our website (ato.gov.au), you can find:

    • a series of about 30 animated SMSF videos that explain in a non-technical, straightforward way the key rules and restrictions that apply to running an SMSF
    • a number of free online SMSF trustee education courses developed by industry experts and approved by the ATO.

    Additionally, via ATO online within myGov there is new information for individuals including the ability to view details of all their super accounts reported to the ATO. This information includes account balance and insurance indicators, total super balance (TSB) and the status of bring-forward arrangements relating to non-concessional contributions. This is in addition to the pre-existing visibility of ATO-held super and the ability for individuals to consolidate super accounts.

    Of course, the ATO is not the only source of information and resources for SMSF trustees. The services we provide are complemented by trustee information and resources available from professional associations such as the SMSF Association.

    I’m aware that the SMSF Association has a complimentary array of SMSF trustee resources and education courses for their members. And this expo is another opportunity to share and learn from the experience of others.

    The ATO considers it an important part of our role to provide early warnings about arrangements and schemes that may put SMSFs and trustees at significant risk from a regulatory and tax compliance perspective.

    Of course there will be instances where due to specific or unique circumstances in your fund you may wish to seek specific advice from the ATO that is relevant to you. You and your adviser can obtain this tailored advice and rely on it.

    When making investment decisions for your SMSF, it’s imperative you consider the peace of mind that may come if you obtain advice from an SMSF professional. After all, there has been a lot of change in super lately and it requires careful consideration. Ultimately you are the decision maker but it’s definitely worth bearing the new landscape in mind.

    Assurance activities

    The number of SMSFs reported for the September 2017 quarter reduced from 598,620 to 587,319, due to an increase in wind-ups resulting from the ATO’s cancellation of ABNs for about 8,600 funds.

    To give a sense of churn in the SMSF sector, as at December 2017 we received registrations for some 13,000 SMSFs. All new registrants are treated appropriate to the risk to their retirement savings based on an automated risk assessment. Where new registrants are considered high risk the SMSF is reviewed to determine suitability for registration as an SMSF. In 2016–17, our models identified about 7.6 per cent (2,400) of the 31,000 new registrants that needed further review.

    From some 2,400 pre-registration checks we undertook last financial year, we withheld about 600 registrations and cancelled the ABNs of 573 after further review. By comparison, from 1 July to 31 December 2017 we cancelled the ABNs of 288 funds and placed restrictions on a further 200 funds.

    To date this financial year, we’ve disqualified 214 trustees. The majority of these disqualifications were for illegal early release of funds and loans to members. Sixty-seven trustees came to our attention as part of our pre-SMSF registration checks and early intervention cases; another 50 were disqualified for unrectified contraventions reported through ACRs. The remaining 48 trustees were disqualified for allowing early access of benefits to members and providing loans to members. Additionally, another eight trustees were disqualified for taking part in tax planning arrangements such as dividend stripping.

    By comparison, in all of 2016–17 we disqualified 333 individual trustees, of whom 150 were disqualified after being identified through our pre-registration checks and early intervention fund cases. A further 128 were disqualified as a result of inaction over an unrectified contravention reported by the fund’s approved auditor through an auditor contravention report (ACR) and 55 trustees were disqualified as a result of self-disclosing breaches.

    A more serious concern is that in the past 24 months we’ve progressed 61 dividend-stripping cases involving SMSFs. These arrangements are typically used to move large sums of money into the concessionally taxed super environment.

    In some cases, trustees have been removed and trustees have agreed to roll their assets into an APRA-regulated fund. From an income tax perspective, trustees are being required to repay franking credits and forego the benefit of future franking credits.

    Behaviours inform decisions

    So, as you can see, the ability to operate an SMSF is an important obligation and one which the ATO takes seriously. Newly registered SMSFs and existing SMSFs with membership changes are assessed against a combination of risk attributes and financials of the fund and member.

    Overall we take action against approximately 300 individual trustees every financial year; and unfortunately the trend seems likely to continue.

    We never lose sight of the reality that our greatest ally against potential mischief within the SMSF sector is each of you. It is you, in your various roles across the sector, who can advise or exercise prudence, seek advice as necessary and therefore prevent breaches before they occur.

    Nearly everyone in the SMSF sector, whether as a member, trustee, adviser or tax agent, influences and hears ‘bright ideas’ first-hand. As I’ve said already: ‘if it sounds too good to be true, it probably is’. Unfortunately, it’s just the way of things that although 99.5 per cent of people may do the right thing, it’s the other 0.5 per cent who will get the attention.

    There is no advantage for any of us to be involved in a sector which has a poor reputation regardless of the fact that the majority do the right thing.

    As a significant investment vehicle, running an SMSF appropriately depends on the central role of trustees and their willingness to meet their regulatory obligations and operate in an ethical and appropriate manner. The SMSF sector should be pleased with its reputation and performance; it has been solid for many years.

    Reform and change can give rise to many ‘what if I do this?’ scenarios. But if we all call out, try to prevent, and even report, questionable behaviours such as the provision of inappropriate advice or the promotion of aggressive tax planning schemes or more serious matters involving the theft of people’s hard-earned super through fraud, we’ll all be better off.

    As we’ve noted before, sometimes people act on the advice of a ‘friend’ who has a ‘great idea’ for a no-risk, high-yield investment. Or a scheme may be marketed or pushed to fund members. While I think such things aren’t common practice, it’s our collective vigilance and early action that has ensured the reputation of the SMSF sector remains as high as it is now. After all, any concessionary system is attractive and open to abuse.

    Topics of interest

    An appreciation of the impact decisions made for this sector can have is especially important as we move further into the calendar year. We’re all emerging from 2017, where much foundational work was done to get across the super reforms. These reforms are now law and the majority will directly impact the 2017–18 financial year.

    The reforms have generated considerable commentary since 1 July 2017. The ATO appreciates that trustees may need guidance at such a time so I’d like to address a few topics to provide a sense of perspective.

    From our point of view, the post-super reform environment has highlighted three important issues for SMSFs:

    • the need for SMSF trustees, members, and their advisers to have access to early guidance and certainty of position from the ATO in its role as regulator and tax administrator of SMSFs
    • the need for individuals to have visibility of and access to up-to-date information about their super interests and account balances across all their super funds so they can make informed decisions based on their particular circumstances
    • the ability for individuals to be able to make important financial and investment decisions to achieve optimal outcomes in terms of their financial future in retirement, with the confidence of knowing their SMSF complies with the regulatory and tax rules and knowing they’re not at risk of overstepping the line into unlawful retirement-planning arrangements.

    Transfer balance cap and event-based reporting

    The 2016 super budget measures of course essentially came into law from 1 July, 2017. It’s fair to say that, as with other changes, the measures have increased the need for all in the super industry to be aware of and actively monitor their super account balances.

    Although 1 July 2017 has passed, the changes remain a primary area of focus for SMSFs as the consequences of the changes materialise and SMSFs make decisions in the context of the new caps and limits that apply. Resulting from this, the importance and consequences of SMSF asset valuations have undoubtedly increased and it’s imperative that SMSF asset valuations are supported by objective data and evidence.

    There are naturally a number of aspects to the recent super changes. Central and pivotal to almost all though, are the concepts of an individual’s ‘transfer balance cap’ (TBC) and their ‘total super balance’ (TSB) and additionally, the limits on concessional and non-concessional contributions.

    As a reminder, the TSB is the sum of all of the accumulation-phase and retirement-phase interests across all of an individual’s super funds. Relevantly, it is measured and determined annually at 30 June based on relevant asset values supporting accumulation-phase and retirement-phase interests at that date.

    Importantly, an individual’s TSB at 30 June each year has several impacts for them in the context of the financial decisions they make in the next financial year. In particular, the TSB impacts a person’s available contributions caps and ability to access several tax offsets in the following financial year. The TSB of SMSF members can also impact the way their fund calculates exempt current pension income (ECPI).

    In contrast to TSB, the TBC is focused solely on an individual’s retirement-phase interests. The TBC limits the amount or value an individual can transfer into the tax-free retirement phase across all their retirement-phase interests.

    There are real consequences for exceeding the TBC, which in the 2017-18 financial year is $1.6 million. If you exceed it, you will have an excess transfer balance which you will need to remove from retirement phase and you will have to pay excess transfer balance tax.

    In terms of the reporting process for SMSFs, event-based reporting (EBR) is a new reporting obligation from 1 July 2018 for funds with at least one member with a super account balance over $1 million. SMSFs will report via the transfer balance account report (TBAR) form which enables both the ATO and, importantly, individuals to track their position in relation to the current $1.6 million TBC and TSB. Further information on this topic is available on our website under Event-based reporting for SMSFs.

    By comparison, most APRA funds started to report to the ATO from December 2017 via the TBAR form. By way of update, as at 31 March 2018 we have received in the order of 2.6 million TBC reports, which included some 8,520 from SMSFs who have voluntarily reported their TBC before the 1 July 2018 start date.

    The total number of excess transfer balance determinations issued by the ATO until 31 March is in the order of 2,500 where a member’s TSB is over $1.6m. Members who receive these determinations have 60 days to confirm their records and take any necessary action.

    For those who received determinations earlier this year, we’ve now issued 360 excess transfer balance tax assessments.

    Lodgment

    SMSF lodgment is a cornerstone obligation for any trustee in a properly operating SMSF. Throughout this financial year we have increased our assurance activities to seek to reduce the level of long-term outstanding lodgments. While approximately 86 per cent of SMSFs lodge on time each year, one of our projects this financial year is to target those who have not lodged for some time.

    To date, over 6,000 funds have re-engaged with us and brought all their lodgments up to date; but we took harsher action against some 8,600 funds which resulted in the wind-up of the fund and the cancellation of their ABNs.

    We believe this is a timely reminder of the importance of trustee obligations as well as of the actions we need to take as regulator to ensure the good reputation of the sector and its members.

    With respect to 2016–17 lodgments of SMSF annual returns, we issued a media release on 19 January 2018 confirming we had granted a deferral of all SMSF lodgments until 30 June 2018. The extension of the due date for lodging 2017 SMSF annual returns also applies to the due date for payment of any relevant 2017 financial year income tax liability.

    I can report that at the end of March just about 50 per cent of SMSFs have lodged already but trustees do have until 30 June 2018 (or the next business day, as 30 June is a Saturday) to lodge a return with an election for transitional CGT relief as part of the super changes that came into effect on 1 July 2017, or amend a lodged 2016–17 return in order to include an election if one wasn’t made.

    It’s important to note that we won’t be granting an extension for next year’s return. We have given this concession for the past two lodgment periods taking into account the possible impacts of the new measures on funds; however we think you should now have had enough time to get your affairs in order.

    A key part of lodgment decisions this financial year is the treatment of CGT. To that end I remind you that in February we published updated guidance on Transitional CGT relief which is available on our website. The updated material provides detail on the operation of the CGT relief provisions, including how they can apply to an SMSF paying a TRIS.

    This is important because if you choose to apply for transitional CGT relief, you need to advise us by completing the CGT schedule on the 2016–17 SMSF annual return.

    It’s important trustees are aware that CGT relief is not automatic and that once the CGT election is made in the annual return, it’s irrevocable.

    Therefore, we strongly encourage anyone considering taking advantage of this transitional CGT relief to refer to our updated material and seek independent professional advice before making an election.

    Cryptocurrency

    Of course the work we all do is not just about SMSF regulatory and tax compliance; we also need to keep an eye on the operating environment in which SMSFs function in a modern financial world.

    A good example is the current interest in cryptocurrency. While the regulatory and tax laws that apply to SMSFs don’t specifically prohibit investment in Bitcoin or other cryptocurrencies, in addition to the tax considerations that arise there are also super regulatory matters that must be considered by anyone contemplating investing in cryptocurrencies in their super fund.

    The nature of these currencies may mean it’s more difficult to comply with the regulatory rules and restrictions that apply to SMSF investments – for example, the regulatory requirement that a fund’s assets are managed separately from members’ personal and business assets and ensuring that the SMSF has clear legal ownership of the Bitcoin or relevant cryptocurrency, as well ensuring that the investment is appropriately valued for both accounting and tax purposes.

    So, as is always the case with any SMSF investment, trustees need to ensure that an investment of this nature is consistent with their fund’s investment strategy.

    Limited recourse borrowing arrangements

    We also appreciate there is at times interest in the level and nature of limited recourse borrowing arrangements (LRBAs) and the level of borrowings in SMSFs.

    From our recent published data I can advise that as at 31 December 2017 LRBA asset holdings represent just over 4 per cent of total SMSF assets.

    We estimate that 94 per cent of all LRBA assets relate to real property. Overall the trend for the period from December 2013 to December 2017 shows that overall SMSF investment in residential property was in the order of 6.8 per cent.

    In summary, in any of these topics of interest outlined here, we ask that SMSF trustees ensure they feel comfortable that they are able to make informed decisions and if necessary seek independent professional advice, before committing to any new type of investment in their fund.

    Conclusion

    Before I close, I should mention that you may be interested to view the ‘SMSF overview’ infographic in our latest published Self-managed super funds: a statistical overview 2015-16 (once you’ve clicked into the overview, scroll down to the ‘2015-16’ infographic PDF).

    I would like to leave you with some key take-outs so we can work together to our mutual benefit.

    • CGT relief is designed to assist SMSFs transition to the super changes and the $1.6 million transfer balance cap. If trustees choose CGT relief, they must advise us using the approved form by completing the CGT schedule to the 2016-17 SMSF annual return on or before, the day they are required to lodge.
    • Event-based reporting is a new obligation for funds that have at least one member with a balance over $1 million dollars. We recognise the importance of individuals being able to track their position in relation to the current $1.6 million transfer balance cap.
    • Willingness to act early to rectify compliance issues is a key factor when we decide on the remission of penalties or sanctions that might otherwise apply.
    • Provided you are willing to work with us and take the necessary steps to resolve the situation we will support you through this service to get back on track to good compliance in your fund with a lower level of enforcement action or intervention from us.
    • Our greatest ally against any unintended consequences or mischief within the SMSF sector is each of you.
    • In your various roles across the SMSF sector, you can exercise good judgment, advise or seek advice as necessary and therefore prevent breaches before they occur.
    • We prefer prevention to detection to ensure your retirement future is as good as it can be for you.
    Last modified: 30 Apr 2018QC 55239