• SMSF regulator's compliance update – November 2015

    This webinar discussed:

    • our risk approach to SMSF registration
    • warnings about operating an SMSF to gain a present day benefit
    • current regulatory compliance issues
    • our approach to applying our new compliance powers
    • issues and outcomes of misuse of auditor details

    See also:

    Your questions answered

    The following questions were commonly asked during the SMSF Regulator's compliance update webinars we ran in November 2015.

    The questions have been separated into the following categories:

    SMSF registration and lodgment

    What is meant by legally established when referring to first year funds and the return not necessary (RNN) status?

    An SMSF must have assets set aside for the benefit of members in order to be legally established. Prior to 1/1/2015, applications for ABNs for SMSFs did not ask if the fund had assets, so some funds were registered without assets and were allowed RNNs for their first year of operation. The process to register an SMSF and receive an ABN changed from 1/1/2015. If an ABN has been issued then the applicant has stated that the fund had assets at the date of application. An RNN cannot be applied because the fund has assets and therefore must be audited and lodge a return.

    Is a small cash balance considered a sufficient asset when registering an SMSF?

    If you expect to receive a rollover, transfer or contributions in the near future, an SMSF can be established with a nominal amount. It is sufficient for the nominal amount to be a small amount of cash, for example $10, to enable the establishment of the SMSF. It must be noted that since 1/1/2015 an SMSF cannot be established and issued an ABN unless it has assets. Please refer to QC46637 for more information on the ABN entitlement process.

    How can SMSF ABN registration processing be improved?

    We are aware of a number of issues regarding the ABN registration for SMSFs and the publishing of a fund on Super Fund Lookup.

    • One issue relates to processing issues experienced when we implemented a major release some time ago. We are working to resolve these issues and implement fixes.
    • Other issues include:
      • some applications are pushed offline due to issues in the data received, however no explanation of the issue is provided to the user
      • industry concerns about a fund needing an asset to be able to register for an ABN.

    We have acknowledged industry concerns and will undertake a process to look at how we register SMSFs in consultation with industry.

    Undertaking an audit

    What is the ATO’s position on the use of auditing software and programs to receive audit documentation and in completing the audit process online?

    It is up to the SMSF auditor to plan and prepare an audit program, to satisfy with reasonable assurance the outcome of the audit. Further information of acceptable procedure may be found in the auditing standards, your professional association or other peers. Whether digital records or otherwise, the auditor should satisfy themselves of the quality, and authenticity of the records provided and keep sufficient evidence to support their opinion.

    What is the ATO’s view of audit work being outsourced overseas to keep audit costs low?

    We appreciate industry concerns about low cost audits – but we also expect that auditors are likely to have a sliding scale of costs for SMSF audits based on the complexity of a fund and time involved in completing a quality audit. Low cost may be a potential indicator of lack of quality, and we continue to undertake reviews of SMSF auditors wherever we are concerned that low quality audits are being completed.

    With any outsourcing arrangements, it is still ultimately the SMSF auditor responsible for ensuring the quality, accuracy and completeness of the audit undertaken. If we review the work of an SMSF auditor, the auditor is responsible for their audit opinion, irrespective of who may or may not have performed some of the work. We would also expect that all working papers from the SMSF Auditor are available to us upon request. If not made available because they are outside Australia and cannot be retrieved the SMSF auditor would be failing their audit obligations.

    Are digital certificates acceptable in lieu of original signatures?

    One of the responsibilities of an SMSF trustee is to ensure proper and accurate tax and super records are kept. If you keep electronic records, they must be capable of verification by us and be in a form we can access and understand.

    If electronic lodgment of an approved form is permitted under section 11A(3)(b) of the SISA, and it contains a person’s electronic signature, the form will be taken to be signed by that person (section 11B of the SISA).

    Section 11D of the SISA provides that other documents (that are not approved forms) may be lodged electronically if the Regulator has approved in writing the lodgment of documents of that type.

    Trustee issues

    Under what circumstances would the ATO disqualify SMSF trustees?

    An individual may be a disqualified person either by the operation of law or by decision of the Commissioner. The Commissioner may disqualify an individual if satisfied that:

    • the individual has contravened the SISA or the Financial Sector (Collection of Data) Act 2001 (FS Act)
    • a corporate trustee contravened the SISA or the FS Act and the individual was a responsible officer at the time of the contravention, and
    • the nature or seriousness of the contraventions or the number of contraventions provides grounds for disqualifying the individual [subsections 126A(1) and (2)].

    The Commissioner may also disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee or a responsible officer of a corporate trustee of a fund [subsection 126A(3)]. For more information about the circumstances when a trustee is disqualified, see Disqualification of a trustee.

    If the member is a disqualified person, they are committing an offence by acting as trustee of an SMSF and must cease being a trustee. Further information about disqualified trustees can be found at QC23314. A case study regarding a trustee who has been convicted of an offence involving dishonesty can also be found at QC44470.


    How often do valuations need to be done?

    Asset valuation is a key component in preparing meaningful SMSF financial reports. A valuation of assets is required to confirm your SMSF has complied with relevant super law for:

    • preparing the financial accounts and statements of the fund
    • acquiring assets between SMSFs and related parties
    • investments made and maintained on an arm’s-length basis
    • disposing of certain collectables and personal use assets to a related party of the fund
    • determining the market value of an SMSFs in-house assets as a percentage of all assets in the fund
    • determining the value of assets that support a members’ super pension.

    For the 2012–13 and later years, assets must be valued at market value.

    You should consider the value of fund assets each year. However this does not mean that a valuation from a registered valuer needs to be done for all assets each year. For example, assets such as real property do not need an annual valuation unless a significant event occurred that changed its value since it was last valued. Assets such as cash and listed securities can be easily valued and should be valued at the end of each financial year.

    In certain instances the law requires valuations to be undertaken by a qualified, independent valuer (see QC26343Valuation Guidelines for Self-managed super funds), however it is usually the valuation process undertaken rather than who conducted it that governs the acceptability of a valuation. In all cases the person who conducts the valuation must base their valuations on objective and supportable data.

    With the transition period for collectables and personal use assets coming to an end in 2016 a number of acquisitions of collectables from funds by members are expected. Can a qualified independent valuer only be a registered valuer?

    From 1 July 2016 any collectables or personal use assets that were acquired by the SMSF before 1 July 2011 and disposed of to a related party after 30 June 2016 will require a valuation by a qualified independent valuer. If the asset is disposed of prior to 1 July 2016, it is required to be done at market value and on an arm's length basis.

    A valuer will be qualified either through holding formal valuation qualifications or by being considered to have specific knowledge, experience and judgment by their particular professional community. The valuer must also be independent. This means that the valuer should not be a trustee or director of a corporate trustee or member of the fund or a related party of the fund (for example, an investment partner). They should be impartial and unbiased and not be influenced or appear to be influenced by others.

    Our Valuation guidelines for self-managed superannuation funds provides further information on valuing assets for super purposes.


    Would an LRBA with a lower than commercial interest rate be considered a breach of the arm’s length provisions?

    An LRBA financed by a low interest loan will not cause a breach of the arm’s length provisions of the SIS Act because the interest payable is no more favourable to the lender than if a commercial or arm’s length rate of interest had been paid. The SMSF auditor would not be required to report an arm’s length breach to us. 

    However we have outlined our view that the non-arm's length income provisions can apply when an SMSF undertakes an LRBA on terms that are not consistent with an arm's length dealing. This view has been set out in ATO ID 2015/27 and ATO ID 2015/28 (which replaced ATO ID 2014/39 and ATO ID 2014/40). Income earned under such an arrangement may be subject to extra tax if it is determined that the parties are not dealing at arm’s length.

    SMSF trustees should review any LRBA they have to determine whether it was established and maintained on terms that are consistent with an arm’s length dealing. If this is not the case, we strongly encourage them to take steps to ensure that it is on terms consistent with an arm’s length dealing by 30 June 2016 or to bring the LRBA to an end by that date. Trustee's should ensure that any new LRBAs entered into are established and maintained on terms consistent with an arm’s length dealing.

    QC 49144 ATO extends deadline for review of non arm’s length LRBAs provides further information regarding non arm’s length LRBAs.

      Last modified: 21 Jul 2016QC 49077