DIY super may feel the taxman’s bite

DIY super trustees may hear a knock on the door from the tax office soon, even before June, says TERRY HAYES. Make sure your SMSF is on track; your fund, and your future, depend on it.

By Terry Hayes

DIY super trustees may hear a knock on the door from the tax office soon, even before June. Make sure your SMSF is on track; your fund, and your future, depend on it.

The boom in self managed super funds is rolling on. With more than 47,000 new funds established last calendar year and assets now topping $300 billion, the sector is a growth dynamo.

The regulator of those funds, the tax office, is not sitting idly by. There are some problem areas it is focusing on, most notably, trustees’ lack of knowledge about running funds. Small and medium enterprises with self-managed funds should take note.

The tax office has announced it is looking closely at newly-registered self-managed superannuation funds (SMSFs) and their trustees to ascertain whether they have sufficient knowledge to meet their obligations.

Although 90% of new trustees surveyed had sufficient knowledge of their lodgement and basic Superannuation Industry (Supervision) Act obligations, 30% could not explain the sole purpose test and over 15% did not have an investment strategy in place.

These are basic issues for SMSFs and the results clearly concern the taxman.

In an effort to help, the tax office says it hopes to release a new publication in mid-March 2008 outlining the regulatory environment for SMSFs and explaining how the taxation commissioner works with trustees and professionals to regulate the industry.

Tax office assistant deputy commissioner Ian Read recently outlined the concerns, and they make essential reading for any small and medium enterprise with a self-managed fund.

The tax office intends to conduct 10,975 audits and reviews of self managed super funds as part of its 2007-08 compliance program. The general focus will be on:

• Auditor contravention reports, mainly unrectified contraventions but also some rectified cases.
• Significant Superannuation Industry (Supervision) Act contraventions.
• New registrants, to build knowledge and enable early intervention.

Loans of 80% or more of assets

The tax office will undertake 550 reviews of funds that reported loans of 80% or more of assets. While the majority of these loans have been made to unrelated third parties, the tax office is concerned that many loans are unsecured, not decreasing in size, lack regular repayments or have poor documentation.

The tax office has identified clear contraventions of in-house asset rules or lending to members and relatives. In some cases, the member or trustee has used the funds to purchase the family home. Other cases examined by the tax office have revealed:

• Concerns about legitimacy, whether loans were made to members or related parties, and whether early access to super is involved (around 25%).
• Interest being capitalised and paid at the end of the loan period.
• Funds being invested in the member’s trading entity.
• Funds being loaned with little or no documentation or security.
• “Unequivocal” fraud.

Other compliance risks

In addition to the issues outlined above, the tax office warns that the following key compliance risks should also be on the radar for SMSF trustees and their advisers:

• Superannuation interest calculations – changes to the concept of a “superannuation interest”, and the way it is calculated, commenced from 1 July 2007.
• Crystallised pre-July 83 segment – funds have until 30 June 2008 to calculate the crystallised pre-July 83 component of each member’s interest.
• In-house asset grandfathering – the in-house asset transitional arrangements end on 30 June 2009 for re-investments of certain dividend and trust distributions.
• SMSF residency – the definition of “resident superannuation fund” has been replaced by a new definition of “Australian superannuation fund” which does not have a specific two-year temporary absence rule.
• Streamlining reporting – from the 2007-08 year, SMSF trustees are only required to lodge a single annual return.
• New penalties – from 1 July 2007, covering a failure to lodge documents, providing false or misleading statements, failure to keep and retain records, and failure to advise of a change of trustee or other changes to the fund.
• Trustee declaration – new trustees are required to sign a declaration no later than 21 days after becoming a trustee or a director stating that they understand their duties as trustees of a SMSF or a corporate trustee.
• Contributions where no-TFN – a regulated superannuation fund cannot accept any member contributions from 1 July 2007 if the member’s TFN has not been quoted. In addition, a SMSF must not accept any fund-capped contributions in an income year in respect of a member who exceeds the relevant cap.
• Transitional non-concessional contributions – the commissioner will be checking transitional non-concessional contributions and monitoring transitional release authorities to ensure compliance.
• Transfer of assets – possible increased risk of inappropriate transfers to superannuation and avoidance of CGT obligations.

Approved fund auditors

The tax office said it will undertake 900 audits and reviews of individual approved auditors of SMSFs in 2007-08, comprising:

• 300 high risk audits.
• 500 reviews.
• Reviews of five large accounting practices, to commence in late 2007-08 and continue for three years.

According to the tax office, some auditors are failing to follow basic standards, such as failing to maintain any working papers and lodge a contravention report when prima facie they are required to do so. Some 188 high-risk audits are in progress with deficiencies identified in the audit processes in 41 cases.

Top 10 checklist for trustees

The tax office has listed its top 10 checklist of key points for SMSFs:

1. Make sure fund trustees understand the regulatory framework, where their responsibilities begin and end, and where to go for more information.
2. Keep on top of SMSF developments.
3. Remind new trustees that they must sign a trustee declaration within 21 days of becoming a trustee.
4. Advise the tax office within 28 days of any changes to trustees.
5. Ensure that funds have the TFN of all members.
6. Ensure all reporting obligations are met.
7. Ensure that trustees appoint an approved auditor to complete their audit before lodging the income tax/regulatory return.
8. For approved auditors, contravention reporting is unchanged until July 2008 but the auditor contravention report must be used.
9. Make sure the taxable and tax-free components for each benefit paid are calculated, including calculating the crystallised segment for the tax-free component that applies from 1 July 2007.
10. Adhere to the contributions caps and rules for acceptance of member contributions.

Self-managed super funds can provide great flexibility and control for SME owners. But with that flexibility and control come responsibilities under the law.

With the tax office now taking a very close interest in SMSFs, there is simply no substitute for getting good professional advice about setting up or running such a fund. The fund and SME owner’s future may depend on it!

Terry Hayes is the senior tax writer at Thomson Legal & Regulatory , a leading Australian provider of tax, accounting and legal information solutions.

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