In 1999, regulation of 189,000 SMSFs passed from the Australian Prudential Regulatory Authority (APRA) to the ATO.
At that time, SMSFs were growing at the rate of 470 per week and were subjected to relatively low intensity regulation by APRA.
The number of SMSFs has continued to grow steadily. As at 30 June 2006, the ATO was responsible for monitoring over 320,000 SMSFs for compliance with the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (Cth).
The Australian Taxation Office's Approach to Regulating and Registering Self Managed Superannuation Funds (Report) is the first of two reports by the Australian National Audit Office (ANAO) which will gauge the effectiveness of the ATO's regulation of SMSFs. The Report examined:
The report is less than flattering, and will surprise any practitioners who have assumed a robust level of SMSF supervision.
From June 2001 to June 2006, the level of superannuation investment in Australia grew by 76% to $913.6 billion. Approximately 25%, or $209.9 billion, was invested in SMSFs.
Other interesting trends identified over the five years were:
The ATO predicts that the introduction of 'Simpler Super' will increase the attractiveness of super, resulting in a continuing need for the ATO to focus its attention on compliance with the SISA.
The number of SMSFs, and the amount of money invested in them, is good cause for proper regulatory oversight of SMSFs.
Even though there are a relatively small number of SMSF members, they received an estimated $3.95 billion dollars in tax concessions in the 2005/6 year. One would expect this foregone revenue would elicit strong governance by the ATO — but the Report found the reality is the reverse.
The ATO clarified its prudential role under the SISA after taking on the regulatory role. It concluded that, unlike APRA, the ATO has no prudential role in reviewing or commenting on specific investment strategies prepared by SMSF trustees, and consequently makes no attempt to do so. Basically, it is not the ATO's business.
This practice is consistent with the government's original policy intent, which specified that "whilst SMSFs are a key vehicle in the accumulation of retirement savings, they do not require onerous prudential supervision as members should be able to protect their own interests."
The ATO advised ANAO that it is in the process of developing a new publication that will clarify its role and responsibilities — or lack of them? — for the public.
The Report says that the ATO does not effectively scrutinise SMSFs.
For an SMSF to receive tax concessions, it must lodge a registration form within 60 days of being established, and be issued a notice of compliance.
The ANAO analysed ATO registration data for compliance with the SISA and looked at the:
Number of members
A fundamental requirement of an SMSF under SISA is to have between one and four members. The Report found that in August 2006, approximately 6,900 funds had either zero or greater than four members and were therefore non-compliant.
Although a small but significant percentage of the total number of funds, the ANAO was concerned that the ATO has no system for determining whether or not this was a result of incorrect registering, or the funds became non-compliant after registration.
Zero asset balances
The asset balances of SMSFs under the SISA must initially be at least $1.
There have been 40,000 cases since 1999 of SMSFs reporting zero balances. Of these, 11,000 reported a zero balance for more than one year. The ANAO recognized this could be unreported wind-ups of funds, but equally could have been due to faulty registrations of arrangements that are not SMSFs.
Funds must choose to be regulated by the ATO within 60 days of being established.1 Since 1999/2000, 23% of SMSFs did not lodge their choice within 60 days (although there has been an increase in compliance in recent times).
In an interesting insight into regulatory priorities, the ATO advised ANAO that it has only sought to penalize funds that did not lodge within 365 days of being established. The reason being that its compliance resources are better used on other activities. At the time of the audit, the ATO did not monitor the 60-day rule and did not systematically take action against funds that do not meet their SISA obligations.
There is no certainty as to whether an SMSF issued with a compliance notice is compliant. The ATO does not analyse all of the information contained on the registration form at the time it is lodged. It relies on trustees for the honesty and accuracy of information.
Since 2004, the ATO has used the following information on registration forms for intelligence and to develop risk profiles at an industry-wide level:
However the ATO says that the earliest it can use this intelligence in compliance activity is 18 months after the fund is registered.
The ATO does not use this information to assess whether or not to register the fund and issue the compliance notice. The ANAO recognized that the ATO must use a risk-based approach and cannot examine all new fund returns, but considered "the Tax Office's approach does not provide a high level of assurance at the time of registration that funds are complying with their SISA requirements."
Once the notice of compliance is issued, few SMSFs are reviewed to determine actual or continuing compliance.
A further startling statistic relates to lodgement of fund returns. In the 2004/5 year, approximately 30% of SMSFs did not lodge their income tax and regulatory return on time. Approximately 8% of SMSFs have never lodged a return.
The ATO advised it is introducing a lodgement program in 2007/8 that aims to increase compliance from 70% to 94% within 6 months of the due date.
While acknowledging the ATOs introduction of new regulatory measures (including streamlined returns, new trustee declarations, new administrative penalties and the increase in the supervisory levy) the Report states such initiatives do not go far enough.
The ANAO made six recommendations which were all accepted by the ATO. In summary
How these recommendations will be implemented remains to be seen. But the move towards more intensive regulation of SMSFs gathers pace.
For more information about the Report or superannuation generally, contact Maddocks on 03 9288 0555 and ask for a member of the Maddocks superannuation team.
Paul is a Special Counsel in the Maddocks Commercial team with particular expertise in commercial agreements for the supply of goods and/or services, the Personal Property Securities Act 2009, the National Consumer Credit Protection Act 2009 and the National Credit Code and the Australian Consumer Law.
Paul's key areas of practice include:
Before joining Maddocks, Paul was employed for 13 years with the Victorian Department of Justice, principally as a Deputy Registrar in the Victorian Magistrate's Court, but also as a legislation, policy and project officer for the Department.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.