Australian Tax Office (ATO) Compliance Program 2009-10
The ATO Compliance Program 2009-10 details the tax and superannuation compliance risks the ATO is most concerned about for SMSFs — and explains what the ATO is doing to address those risks. You can access the program here.
The compliance program for 2009-10 concentrates on regulatory issues including:
- in-house assets;
- borrowings; and
- non-arms' length transactions.
ATO tips for SMSF complianceThe ATO's key tips for SMSF compliance are:
- Trustee(s) and their advisors must treat the SMSF on the one hand, and the trustee(s) personal business assets on the other hand, as independent.
- Lodge income tax returns on time and pay the supervisory levy. Non-lodgement is seen as a contravention and an SMSF can be made non-complying as a result. If an SMSF does not lodge on time, then it immediately attracts the attention of the ATO which will then examine the SMSF's overall compliance.
- Avoid misreporting and calculation errors with SMSF annual returns.
- Ensure all assets are re-valued to their current market value before starting to pay a pension.
- Keep all documents used to prepare the SMSF's annual return. You need to keep documents that:
- explain how the SMSF's income has been generated;
- explain the SMSF's deductible expenses;
- are used to prepare the SMSF's returns, accounts and statements;
- are used to calculate the SMSF's income tax liability; and
- are used by an independent auditor to determine how the SMSF's has complied with super laws.
What are the most common reporting errors?
The most common reporting errors made by SMSFs relate to:
- Residency — the SMSF must meet the criteria to be classified as an Australian super fund. See taxation ruling TR2008/09 and previous ClearLaw articles
- Reporting of non-arm's length income — often reported incorrectly due to misreporting and tax agent error i.e. incorrect trust codes;
- Insurance premium claims — an SMSF may use a variety of life policies to provide super benefits on death or temporary or permanent disability of members. There is an allowable deduction of 30% of the premium if the policy is a whole-of-life policy.
- Capital Gains Tax (CGT) — the CGT consequences of certain transactions must be considered;
- Illegitimate deductions for investment expenses — due to either overstatement or incorrect claims on the annual return. The ATO has found the most common reason for misreporting was recording items that were capital in nature using the incorrect "label";
- In specie distributions — failing to record the true market value of an asset in the accounts can lead to circumvention of the contribution caps and a transfer can lead to revenue risks including the avoidance of CGT; and
- Recording SMSF assets — SMSF trustee(s) should appropriately record the assets of their SMSFs as being held on trust for the beneficiaries of the fund.
In certain states, the legislation may prevent trustee(s) from holding assets using the SMSF's name in the title. In this case, the ATO states that a caveat, instrument or declaration of trust must be executed for the asset. For example, this may include the trustee for the SMSF as the asset owner (i.e. John Smith as trustee for John Smith Super Fund).
How does the ATO deal with SMSF compliance breaches?
The ATO's stated approach in response to a breach is to further educate trustee(s) and tax agents so that they are aware of their responsibilities and obligations. The action the ATO then takes when an SMSF breaches the law depends on the individual circumstances.
When considering action taken by SMSF trustees, the ATO looks at:
- the seriousness of the breach;
- the behaviour of the trustee(s); and
- the tax consequences.
When non-compliance is established, the ATO will issue a non-compliance notice to the SMSF trustee(s).
The ATO's approach is to work with SMSF trustee(s) to help them rectify breaches largely caused by circumstances outside their control. However, if the trustee(s) make no effort to rectify the breach, then the SMSF may be classified as non-complying. As a consequence, its concessional tax treatment will be cancelled retrospectively.
What are the regulatory penalties?
Failure to comply with the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994, can result in the ATO imposing a range of penalties.
The ATO may:
- Suspend or remove a trustee, or all of the trustees of a SMSF. If they are suspended, then the ATO must appoint a constitutional corporation or an individual as the 'acting trustee' during the period of suspension. The ATO may then direct the acting trustee to do any number of acts or things which may include winding up the SMSF or disqualifying the trustee(s);
- Disqualify a trustee (or a director of a trustee) for not being a fit and proper person;
- By written notice, direct a trustee (or a director of a trustee) not to dispose of or otherwise deal in a particular way, any of the assets of the SMSF until the notice is revoked;
- freeze an SMSF's assets; and
- impose fines and imprisonment. If a trustee (or a director of a trustee) is found guilty of either any civil or criminal offence under a civil penalty provisions, then the maximum penalties that may apply under Part 21 of the SIS Act are $220,000 (civil proceedings) or five years imprisonment (criminal proceedings) (or both).
Do any other types of penalties exist?
For less serious matters, the ATO may agree to allow trustee(s) to rectify the problem (without the ATO necessarily imposing regulatory sanctions).
Administrative income tax penalties may apply if the trustee(s) make a statement (or fail to lodge a statement) that results in the underpayment of tax. The penalty imposed depends on the conduct of the trustee(s).
A general interest charge is also applied to tax payments not received by the due date. The general interest daily charge rate is worked out by adding seven percentage points to the 90 day bond accepted bill rate for that day, and dividing that total number by the number of days in the calendar year.
Can SMSF trustee(s) appeal ATO decisions?
Trustee(s) can appeal an ATO decision by applying to the Administrative Appeals Tribunal to reverse the decision.
What information does the ATO make available on SMSFs?
The main types of ATO SMSF advice available are:
1. SMSF public rulings, SMSF determinations and SMSF product rulings; and
2. SMSF specific advice.
Read about the differences between private and public rulings here under paragraph 1 of the Pre-Audit Strategy.
The requirement for SMSF product rulings and SMSF specific advice is that the ATO must be provided with all relevant facts in relation to the matters on which the SMSF advice is sought.
The ATO provides SMSF specific advice in writing to a specific transaction or arrangement that SMSF trustee(s) have entered into, or might, enter into. The ATO advice is based on the facts of the specific transaction or arrangement defined in the application for SMSF specific advice. While similar in form to a tax private ruling, SMSF specific advice is not binding on the ATO and does not have the same review rights as a private ruling.
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation or Tax and Revenue Team.
More Cleardocs information on related topics
You can read earlier ClearLaw articles on a wide range of SMSF topics here.
Order SMSF related document packages
Download a checklist of the information you need to order a document package.
 ATO's SuperUpdate Newsletter, April 2005.
 The following information is based on a speech by Stuart Forsyth, Assistant Commissioner of SMSF segment, SISFA on 14 September 2009, 'Self-managed superannuation funds — common mistakes and other compliance issues.
 Section 133 SIS Act.
 Section 120A SIS Act.
 Under section 264 of the SIS Act.
 Stuart Forsyth, Assistant Commissioner of SMSF segment, SISFA on 14 September 2009, 'Self-managed superannuation funds — common mistakes and other compliance issues..