The Australian Taxation Office has issued a warning to self-managed superannuation fund trustees that it will crack down on trustees using tax planning mechanisms to divert business or personal services income into their funds to reduce tax.
Kasey Macfarlane, ATO assistant commissioner superannuation, says the ATO is concerned about a small number of retirement planning arrangements, including dividend stripping, the diversion of personal services income to SMSFs and non-commercial borrowing arrangements.
“These arrangements give rise to income tax and regulatory issues relating to the sole purpose test and the various restrictions and rules that apply to related party investments and transactions,” Macfarlane says.
She says the ATO has also found a small number of cases recently where SMSFs have become either directly or indirectly involved in business undertakings, commonly property developments.
“An SMSF can undertake a property development or other business venture. However, significant caution is required because the manner in which these activities are undertaken can give rise to breaches of regulatory rules under superannuation legislation,” Macfarlane says.
“SMSFs can also enter joint venture agreements but care must be taken to ensure that the arrangement between the parties and the activities undertaken in accordance with a joint venture agreement don’t give rise to breaches of regulatory rules, particularly related party rules.
“A small number of cases have raised concerns, particularly around the rules for related party transactions and non-arm’s length transactions.
“Our concern is that in some of cases involving SMSFs in related business undertakings may be viewed as a mechanism for diverting members’ business-related income into a more tax concessionary environment.”
Macfarlane says the ATO is focusing on several other areas as well; inappropriate access to super savings; outstanding annual returns; and use of “low cost” auditors.
The ATO receives about 2500 applications for registration of new SMSFs every month. Last year it identified 1700 new registrations where further investigation confirmed individuals were seeking to use an SMSF to inappropriately access their super savings.
It deregistered about 700 of those funds and placed operating conditions on another 1000 until they lodged their first year’s annual return.
“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. In cases where an SMSF doesn’t comply with its lodgment obligations it’s unlikely the required annual independent audit has been undertaken by a registered SMSF auditor,” Macfarlane says.
Currently, about 46,000 funds (eight per cent of total funds) have failed to meet their reporting obligations for two or more years. The ATO will be following up with those funds that have not responded to contact from the ATO and will take action, including facilitating their exit from the sector.
“Due to the threat they pose to the regulatory efficacy of the sector, in the coming 12 months we’ll be increasing our focus on SMSFs with outstanding lodgments,” she says.
In the area of low cost audits, The ATO has found auditors who failed to conduct audits that complied with the auditing standards, had no written audit plan or compliance checklist, and breached independence requirements because they prepared financial accounts for some SMSF audit clients.
It also found auditors who failed to verify fund assets, failed to verify the terms and structure of limited recourse borrowing arrangements and failed to retain documentation in accordance with auditing standards.