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  • The ATO - helping trustees of self-managed superannuation funds to understand their role and meet their obligations

    Presentation to Self-managed Super Fund Association (SMSFA) Trustee Day
    Dana Fleming, Assistant Commissioner, ATO
    16 October 2018, Melbourne

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    Introduction

    Hello, thank you for inviting me to be part of the SMSFA’s Trustee Day. I’m very pleased to have this opportunity to talk to you.

    Today I’m going to discuss:

    • the different ways in which the ATO supports SMSF trustees
    • some common mistakes that trustees make, and
    • what to do if you make a mistake.

    SMSFs are a key part of Australia’s superannuation system. As a government regulator for SMSFs the ATO recognises how important it is for us to work closely with the different participants in the sector, including trustees and advisers.

    Deciding to become a trustee of an SMSF is a positive step towards retirement planning, but it’s not a decision to be made lightly. It requires significant commitment to take charge of your financial future in retirement. Being an SMSF trustee carries specific and wide-ranging responsibilities and obligations that must be met on an ongoing basis.

    Ultimately, as SMSF trustees, you are responsible for ensuring your SMSF is properly managed and complies with all rules, including super laws and the fund trust deed. These rules apply to you in your capacity as a trustee of the SMSF.

    An SMSF must be run for the sole purpose of providing retirement benefits for members or their dependants. You shouldn’t start an SMSF to get early access to your super, to buy a holiday house or artworks to decorate your home.

    The ATO is here to support trustees

    Overall, we 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 understand that most people start SMSFs because they want to manage their retirement, so our aim is to support you as well as to manage the sector as a regulator.

    For this reason, our primary focus is to support, inform 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 an SMSF as easy as possible.

    Many people don’t automatically think of the ATO when they’re looking for advice and information about their super. And of course, it’s true we’re not the only source of information and resources for trustees; professional associations such as the SMSFA complement our services with the resources they provide. However, we do offer a wide variety of online tools and guidance material to support trustees with operating their SMSF and these are available free of charge at SMSF resources section of our website.

    We also encourage you to browse our series of approximately 30 animated SMSF videos that explain in a non-technical and straightforward way the key rules and restrictions that apply to running an SMSF.

    You can also head to our website to access a number of free online education courses that have been developed by real people in the SMSF industry and approved by the ATO.

    To further support you and your adviser in making key decisions, we offer a range of published public guidance, such as public rulings, tax determinations, law companion guidelines and practical compliance guidelines outlining our position in relation to a range of SMSF regulatory and tax matters.

    These public guidance products seek to provide you with certainty about the ATO’s position on a range of issues. They can be relied upon and provide confidence from a regulatory and tax compliance perspective when you’re making important decisions in relation to your fund.

    In March, we created a new public advice and guidance product specifically for SMSF trustees and their advisers: the SMSF Regulator's Bulletin (SMSFRB). This provides our views as regulator about new, or emerging, super regulatory and income tax arrangements.

    Our first SMSF Regulator's Bulletin SMSFRB 2018/1 The use of reserves by self-managed superannuation funds discussed our concerns and view of the use of reserves in an SMSF.

    Online discussion forums

    We also offer online discussion forums such as Let’s TalkExternal Link and ATO CommunityExternal Link.

    Let’s Talk is an ATO platform which hosts different communities including the Superannuation communityExternal Link. This forum was created to encourage open and interactive conversations about our current consultation activities. It’s a space for the community to contribute ideas, share opinions and provide feedback on particular topics. We regularly add new topics and resources to facilitate engagement with the super community.

    ATO Community is another forum where you can find out what other people are talking about, ask questions in the group, share knowledge and discuss your experiences. This is a peer-to-peer forum where information is shared. Where the group is unable to answer questions, our topic specialists will provide answers.

    We encourage you to register to participate in these discussions or register your interest to follow activities specific to super.

    SMSF News and alerts

    To keep up to date with the latest news for trustees, we encourage you to subscribe to SMSF News and alerts. This is a centralised online point with the latest news, useful resources, links and reminders. We add information regularly and it generally remains published for three months. To subscribe for website updates, simply go to the Subscriptions section of our website and for the SMSF monthly newsletter just fill out the subscription formExternal Link on our website.

    Super Scheme Smart

    Another key form of support we provide is to warn the community about schemes and arrangements that seek to take advantage of SMSF trustees. These schemes promise to deliver significant tax or financial benefits beyond those ordinarily available. The arrangements may be complex and structured to appear legitimate.

    We also see arrangements that seem quite simple. They may suggest that super can be rolled out of an APRA-regulated fund into an SMSF and then the money be released for personal use.

    To help identify these schemes and avoid them, we warn SMSF trustees and their advisers through our Super Scheme Smart web pages. You can also keep informed via our SMSF News and alerts.

    You may also consider subscribing to our super email updates and RSS news feeds to be alerted about new or changed super information on our website.

    Entering into illegal arrangements can see people losing all of their retirement savings. The last thing we want is for people’s hard-earned retirement savings being put at risk by unscrupulous promoters. SMSF trustees and members need to be mindful of 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 brought in from 1 July 2017.

    Common mistakes trustees make

    Individuals who choose to establish their own SMSF, at the very least, need to understand the risks, time, resources and compliance obligations associated with setting up and running an SMSF. One of the key messages I’d like to highlight is that trustees need to understand they are ultimately responsible for the operation of the fund and it is an important role that carries certain duties and responsibilities.

    When operating your SMSF, it’s important not to cut corners. You need to ensure your SMSF is set up correctly so that it’s eligible for tax concessions, can receive contributions and is as easy as possible to administer.

    From our interactions with the sector through casework, education and support and risk assessments, the following are areas where trustees commonly make mistakes:

    • new registration
    • sole-purpose test
    • loans
    • in-house assets
    • separation of assets
    • borrowings
    • administration.

    New registration

    If a person has determined that an SMSF is for them, potential trustees should ensure their SMSF has been properly set up before applying for the ABN and to be a regulated fund.

    Two common errors we see at the registration stage are:

    1. Failure to properly set up the SMSF trust before applying for an ABN, such as the legal requirement for the SMSF to hold asset(s).
    2. Not providing accurate or complete details of the members, trustees or directors of the corporate trustee.

    You can find a lot of helpful information at the SMSF checklists section of our website.

    We undertake risk-based pre-registration checks on newly registered SMSFs and new members added to existing SMSFs. This is to prevent individuals entering the system who:

    • are not setting up an SMSF for the sole purpose of managing their retirement
    • have poor lodgment, income tax and debt compliance history that shows they may not be capable of fulfilling trustee obligations.

    Sole-purpose test

    Another area where trustees can encounter problems is around the sole-purpose test. When running your SMSF, all investment decisions must be for the sole purpose of growing and providing retirement benefits – investments that provide current-day benefits to members or related parties of the fund, directly or indirectly, will contravene the sole-purpose test.

    We have just had a recent decision on this by the Full Federal Court in Aussiegolfa v FCT, where the court emphasised the importance of the sole-purpose test for trustees.

    Loans

    Probably the most common regulatory breach we see in SMSFs is in relation to the fundamental rule that prohibits lending fund monies or assets to members or relatives of members of the SMSF. These are payments to members that have not met a condition of release.

    This behaviour is usually associated with a life event such as marriage breakdown, financial pressures or family illness where the trustee uses the SMSF funds to meet an immediate need with little regard for the consequences of accessing their super illegally.

    In-house assets

    An in-house asset is any of the following:

    • a loan to, or an investment in, a related party of your fund
    • an investment in a related trust of your fund
    • an asset of your fund that is leased to a related party.

    Whilst there are some exceptions, in general, as a trustee you are restricted from lending to, investing in or leasing to a related party of your fund more than 5% of your fund’s total assets. If you are unsure if an investment will be an in-house asset, seek independent advice or write to us.

    This behaviour is usually associated with a failing business and the immediate need to inject cash to keep it afloat. The ease of withdrawing money from the SMSF’s bank account may motivate some trustees with cash-flow problems in their business to use the money in their SMSF to boost their business with the intention of paying back the money, but often they don’t.

    A good tip for trustees and advisers is to list all related parties of the fund right from the start and make sure they check the investment restrictions if contemplating a transaction with any of these parties.

    Separation of assets

    We often see trustees fail to ensure assets are held in the fund’s name. A common mistake is bank accounts set up in name of individuals rather than in the name of the SMSF trustees. This is also a common error when acquiring shares.

    Borrowings

    Another problem area for trustees is around borrowing money. SMSFs are generally prohibited from borrowing, although there are some exceptions. The main exception is limited recourse borrowing arrangements (LRBAs). LRBAs are very specific borrowing arrangements that involve a holding trust and as such it’s important to get good advice on set up and structure to make sure you don’t inadvertently contravene the borrowing provisions.

    It’s also important to remember that an LRBA can only be used to acquire an asset that the SMSF is allowed to acquire under the super laws. If the trustee tries to acquire an asset the law doesn’t allow, this will result in a borrowing contravention.

    Administration

    There are a number of common problems we see trustees struggling with when running their SMSF. These include:

    • drafting and updating the trust deed
    • maintaining the investment strategy
    • lodgment obligations
    • valid bank account and electronic service address
    • managing the annual audit process.

    Trust deed: an SMSF’s trust deed governs the operation of the fund and it’s the responsibility of the trustee to think about reasonable processes and timeframes for reviewing the deed.

    An obvious time to update the deed is where there has been a law change or a significant court case that impacts the way the law applies. For example, the law might change to allow a new condition of release but the SMSF’s deed might not have been updated to allow for benefits to be paid out under those conditions.

    We encourage you to regularly review your SMSF’s trust deed and update when necessary.

    Investment strategy: managing and updating your investment strategy is also an area where we see problems. Over time your circumstances may change, possibly in a way that affects your ability to effectively manage the fund and undertake your obligations as trustee.

    Throughout the SMSF’s life cycle, you must consider the individual circumstances of each member and the general condition of the fund. You need to continually reassess whether an SMSF is still the appropriate option for your retirement savings.

    As a result, it’s important to review your investment strategy regularly to ensure it continues to reflect the purpose and circumstances of your fund, taking into account the retirement goals of the members, liquidity or growth needs reflecting the accumulation or retirement phase make-up of the fund and current economic and market factors.

    Lodgment obligations: keeping SMSF lodgments up to date is a cornerstone obligation for any trustee in a properly operating SMSF. While approximately 86% of SMSFs lodge on time each year, there are still many that don’t.

    In March 2017, we focussed on 49,000 SMSFs who had two or more years of outstanding SMSF annual return lodgments. As at July 2018, over 22,000 funds (44.9% of the initial 49,000 population) had either re-engaged with us and lodged all overdue SMSF annual returns or decided to exit the system and wind-up their fund.

    Although we’ve done a lot of work to bring the lapsed lodgment rate down, going forward, we’ll continue to focus on ensuring that SMSFs that have a requirement to lodge, do so, and those SMSFs that have never operated or are no longer operating are wound up and exited from the super system.

    SMSFs with outstanding annual returns concern us because there is no visibility or transparency in terms of the fund’s compliance with its regulatory and tax obligations.

    Valid bank account details and electronic service address: it’s important that you review your SMSF bank account details and electronic service address. We’ve found that a number of SMSFs hold a bank account that is not unique for super payments. To receive automated super payments from us, an SMSF must set up a bank account to hold its own separate bank records. Your tax agent can’t use their own agency’s bank account details for your SMSF.

    To be ready for SuperStream, SMSFs need a valid Electronic service address that they’ve provided to us and other relevant parties such as employers.

    We’re currently aware of about 250,000 SMSFS who are receiving employer contributions (super guarantee), yet over 145,000 (58%) of these SMSFs haven’t reported a valid electronic service address to the ATO.

    It’s your responsibility to protect your fund’s assets and therefore it’s crucial you maintain a separate SMSF bank account and a valid electronic service address. We encourage you to regularly check and update your records with the ATO.

    Annual audits: in cases where an SMSF doesn’t comply with their lodgment obligations, we often find that the required annual independent audit hasn’t been undertaken by a registered SMSF auditor.

    An independent SMSF auditor who is registered with ASIC must complete your fund’s audit each year. If the auditor finds any issues, they will give you a qualified audit report and you must take action to resolve those issues.

    A common contravention occurs when trustees fail to provide requested documents, including accounting records, to their SMSF auditor within 14 days in relation to the audit of their SMSF.

    How we manage non-compliance

    As mentioned earlier, our primary focus is to support, inform and assist SMSF trustees and their advisers to manage their retirement savings in their fund. However, there are occasions when a stronger response is required.

    We can take a number of different actions when we feel a trustee isn’t complying with the super laws. These include written directions to undertake mandatory education, imposing an order that compels trustees to rectify the breach within a set timeframe, the application of penalties, disqualifying trustees or, in more serious cases, making funds non-complying.

    We’ll issue education directions where we feel a trustee may not quite understand their responsibilities, for example, the importance of regularly reviewing the fund’s trust deed or investment strategy. Education directions are designed to improve the competency of SMSF trustees, improve their ability to meet their regulatory obligations and reduce the risk of trustees contravening the law in the future.

    In terms of stronger responses, trustees may face significant penalties if they don’t comply with the regulatory obligations and requirements that come with running an SMSF. If you don’t run your SMSF properly, we may impose a penalty. Examples of contraventions where we can impose administrative penalties include:

    • lending or providing financial assistance to members and their relatives
    • borrowing
    • breaching the in-house asset rules.

    In the 2017-18 financial year we raised $1,743,003 in administrative penalties.

    The current penalty unit is $210, which means that the financial impact can be quite significant for trustees personally. Depending on the severity of the breach, penalties can go as high as $12,600 per trustee. Individual trustees are each liable to the penalty. This means in the case of a four-member fund with individual trustees, the maximum penalty could be as much as $50,400.

    Where an administrative penalty is imposed, individual trustees or directors of corporate trustees are personally liable. Therefore, the penalty can’t be paid or reimbursed from assets of the fund. Directors of corporate trustees are jointly and severally liable to the penalty, whereas individual trustees are each liable to a penalty.

    It’s also important to remember that trustees are ultimately responsible and liable for the maintenance of their SMSF and cannot shift the blame to their professional advisers for contraventions.

    Accordingly, trustees must familiarise themselves with the obligations that relate to the day-to-day management of their fund. For example, penalties apply for breaches including:

    • failure to keep a record of all investment decisions made by the trustees for the fund (20 penalty units) and other more general decisions (10 penalty units)
    • failure to maintain records of any change of trustee or change in directors affecting the fund. Note: trustees must not only keep the  document effecting the change in trustees or directors and the relevant consents but also the mandatory trustee declaration form signed by each new trustee or director (unless the appointment occurred  before 1 July 1 2007); the ATO must also be notified of a change within 28 days of it occurring (10 penalty units)
    • failure to keep all relevant records or disposal of them before the expiry of the mandatory period (generally 10 years) (10 penalty units)
    • failure to keep the assets of the fund separate from the members' personal assets (20 penalty units)
    • failure to keep a separate bank account (20 penalty units).

    As I’ve mentioned, depending on the circumstances, we have the power to make a fund non-complying. Making a fund non-complying can have a significant financial impact on the SMSF because:

    • for every year the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate
    • in the year it becomes non-complying, it includes in its assessable income an amount equal to the market value of the fund's total assets, less any contributions the fund has received that are not part of the taxable income of the fund.

    Trustee disqualification is another action we can take in serious cases. In the 2017-2018 financial year, we disqualified 257 trustees who were trustees of 169 funds. Illegal early release of funds and loans to members were the reasons for disqualification in over 70% of cases.

    Reasons for disqualification:

    • 124 funds had trustees disqualified for allowing early access of benefits to members or providing loans to members.
    • 64 trustees were disqualified for unrectified contraventions reported through ACRs
    • 16 trustees were disqualified for taking part in tax planning arrangements such as dividend stripping
    • 5 were disqualified for non-lodgment of the SMSF annual return.

    Although we do occasionally receive ‘dob-ins’ from disgruntled spouses, the most common way that trustee behaviour comes to our attention is through our registration process or through auditor contravention reports. Last year:

    • 106 trustees came to our attention as part of our pre-SMSF registration checks and early intervention cases
    • 64 were disqualified for behaviour reported via auditor contravention reports.

    Auditor independence

    Through the annual audit of each SMSF, approved auditors perform a critical role in maintaining the health and integrity of the sector. In this role, approved auditors identify and report relevant matters associated with an SMSF and accordingly provide a strong positive influence on trustees.

    SMSF auditors are responsible for demonstrating they meet prescribed standards for independence set out by their professional association. The concept of independence is vitally important. SMSF auditors must be independent and also be seen to be free from bias, personal interest and association.

    We’ve identified situations where auditors have been involved in reciprocal auditing arrangements (where auditors audit each other’s SMSF). In addition, we’re seeing incidents where auditors of a particular fund have also acted as the tax agent for that fund.

    Auditor independence is something we take seriously and trustees should ensure their trustee meets the independence requirements. SMSF trustees should not choose auditors who are relatives or members of the fund or who undertake another role in administration or accounting for the fund.

    Where an auditor is found to have breached these requirements they can be referred to ASIC for not being a fit and proper person; this can result in ASIC imposing conditions on their registration, cancelling their registration or disqualifying them.

    Where this occurs, the SMSF may then be subject to review by the ATO to make sure the fund is complying with all its obligations. If we detect any regulatory contraventions this could result in penalties for the trustee or, in extreme cases, disqualification.

    What to do if you get it wrong

    The last thing I’d like to briefly touch on and which is probably the most important given everything I’ve just talked about, is what to do if you make a mistake or fail to meet your obligations as a trustee.

    The ATO’s role in the SMSF sector is that of a regulator as well as a tax administrator. This does of course mean that the ATO is authorised to enforce the regulatory and tax compliance of SMSFs. However, we ideally seek to work with the sector, undertake early engagement with you and your advisers, and provide certainty ideally to prevent breaches before they occur.

    But we also understand that mistakes can happen and encourage you to be proactive if this occurs. For this reason we have an SMSF early engagement and voluntary disclosure service. It provides a centralised point for you to engage with us where we will work with you to help get your fund back on track. We take your willing engagement into account when considering if any further regulatory action is necessary.

    Note though that the service can’t be utilised by an SMSF that’s subject to a current or proposed ATO audit or review. This is why we encourage you to be proactive and approach us early.

    Since the service was introduced in May 2016, we’ve had (as at 31 August 2018) just over 580 applications and in the vast majority of cases we have been able to work with these trustees and advisors to get the SMSF back on track and avoid more serious sanctions, such as making the fund non-complying or disqualification.

    We’re pleased the service is well used and we find that funds continue to work co-operatively with us once their breaches have been rectified.

    Conclusion

    Overall, we sees our role as one of a facilitator, a supporter and a well-balanced regulator that adopts appropriately tailored and differentiated approaches to maintain the integrity of the sector, encourage willing participation and, most importantly, to protect and ensure confidence in the credibility of SMSFs as a retirement planning vehicle of choice.

    Thank you for the opportunity to be here today. Participating at events such as these is particularly important and we value the support that the SMSF Association provides us in our role as regulator and tax administrator of SMSFs. Also, we acknowledge the dedication that the SMSFA provides in supporting trustees and the SMSF sector more broadly.

    Last modified: 24 Oct 2018QC 57210