ATO targeting tens of thousands of late and non-lodging SMSFs

The ATO is targeting the tens of thousands of SMSFs it has identified as late in lodging their SMSF Annual Return, or having never lodged at all.

Dana Fleming, ATO Assistant Commissioner for Superannuation, told the SMSF Association National Conference that the ATO had identified 64,000 ‘lapsed lodgers’ and just under 30,000 ‘never lodger’ SMSFs.

Late lodging SMSFs

 SMSFs in the ‘lapsed lodger’ category had an average of 3.4 overdue SMSF Annual Returns. About 4,000 of these funds had an Auditor Contravention Report lodged with their last annual return.

 The ATO started chasing this group with a targeted mail out, coordinated with the Tax Practitioners Board, to the 2,728 tax agents and 570 SMSF auditors who have an SMSF with overdue lodgements.

“This group was the first cab off the rank in our lapsed lodger program because we have the highest expectation of tax agents and SMSF auditors, given their professional standing and role in maintaining the integrity of the system. We also know that poor compliance by this group tends is correlated with poor compliance by their clients,” Fleming told the conference.

30% of these professionals are now “back on track”. Fleming said the ATO would refer the remaining 70% for audit if they aren’t actively working with the ATO on their overdue lodgements.

 “We’ve also started to contact the full population of lapsed lodgers to encourage them to bring their overdue lodgments up to date. We’re encouraging them to contact us if they need assistance,” Fleming said.

 “We’ve also removed SMSFs with lapsed lodgments from SFLU [Super Fund Lookup], which means they can no longer receive contributions or rollovers.”

The ATO has also identified approximately 26,000 SMSFs of the 64,000 late lodging funds which are overdue in lodging their Annual Return for the first time.

“Given our finding that once SMSFs stop lodging for the first time, they often stop lodging all together, we have an increased focus on those SMSFs who have not lodged for the first time as a preventative action against potential long term non-lodgment.”

The ATO is contacting these funds to let them know that not lodging can put their compliance status at risk and they could be removed from SFLU.


Never lodged SMSFs

 Fleming said that the ATO was paying “very close attention” to the approximately 6,500 SMSFs which registered in 2017 but haven’t lodged their first Annual Return – which was due on 28 February 2018.

 “We’ve contacted all these funds. Where they received a rollover we’ve asked them to lodge or contact us if they need help. These may just be a group of the early ‘strugglers’ who are new to the system or there could be potential IER [Illegal Early Release].”

 “Where there was no rollover and it appears the SMSF has never operated, we’ve asked them to cancel their registration if this is the case.”

 “If we don’t get a response, we’ll take the fund off SFLU and for those where we can see there has been a roll over, take action on the basis there has been IER.”

 The same action will be taken for new SMSFs which had Annual Returns due on 28 February 2019.

 When it comes to long-term never-lodging SMSFs, Fleming said the ATO had uncovered some “sobering facts”. There has been a steady increase in the number of these funds over the last five years, with “just under” 30,000 SMSFs registered between 2013 and 2018 having never lodged (including the 6,500 SMSFs not lodging their first year Annual Return).

Over 50% of these SMSFs appear to have received a rollover from an APRA-regulated super fund. Also the average amount of these rollovers has been increasing, from $78,000 in 2013 to $140,000 in 2017.

The age of these never-lodging SMSF trustees also skews younger, with an average age of 36. This compares to an average age of 58 for the SMSF population as a whole, based on ATO statistics for the 2015/16 year.

 “We’ve undertaken a pilot of 200 funds to understand this population,” Fleming said.

 “Our analysis shows a variety of reasons for never lodging. Some trustees have never operated, some admitted to IER and some have brought their lodgments up to date. We’ll be doing a mail out within the next few months to the entire never-lodged population.”

 “As with first-year non lodgers, where funds haven’t received a rollover and it simply appears the individual never operated the SMSF, we will ask them to cancel their registration. Where they have received a rollover, we will ask them to lodge and take further action if they fail to do so.”

Source: https://www.solepurposetest.com/news/ato-late-non-lodging-smsf/

SMSFs and property

Mixing property and your self-managed super

You may want to set up an SMSF primarily to invest in residential property. Here we explain when you can use your SMSF to invest in property and what you need to consider before you do.

Self-managed super fund property rules

You can only buy property through your SMSF if you comply with the rules.

The property:

  • Must meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
  • Must not be acquired from a related party of a member
  • Must not be lived in by a fund member or any fund members’ related parties
  • Must not be rented by a fund member or any fund members’ related parties.

However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.

See the Australian Taxation Office’s webpage on self‑managed super funds for more information.

Case study: John and Barbara consider an SMSF

couple-on-pcExperienced property investors John and Barbara are in their early 50s and want to set up an SMSF to use their super to purchase another investment property. They have a property portfolio worth $1 million (with investment loans of $800,000), a combined $200,000 in super and no other investments.

After discussing their options with a financial adviser, Barbara and John decide that an SMSF is not right for them. They realise that a property investment through an SMSF would further increase their debt and reduce the diversification of their assets. Barbara is also concerned about the cost, time and responsibility required to run an SMSF, especially as they get older. Instead they decide to concentrate on paying off their debt and making extra contributions to their super.

What it will cost you

SMSF property sales may have many fees and charges. These fees can add up and will reduce your super balance.

You should find out all the costs before signing up including:

  • Upfront fees
  • Legal fees
  • Advice fees
  • Stamp duty
  • Ongoing property management fees
  • Bank fees

Be wary of fees charged by groups of advisers who recommended each other’s services as it is important to get independent advice. Anyone who gives advice on an SMSF must have an Australian financial services (AFS) licence. ASIC Connect’s Professional Registers will tell you if the company or person holds an AFS licence.

See investing in property for more information.

SMSF borrowing

Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’.

A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.

Geared SMSF property risks include:

  • Higher costs – SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
  • Cash flow – Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
  • Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
  • Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
  • No alterations to the property – Until the SMSF property loan is paid off alterations to a property cannot be made if they change the character of the property.

See borrowing to invest for more information on the risks of gearing.

Property developers and SMSFs

Property developers must have an Australian Financial Services (AFS) licence to provide financial planning advice. This includes advice on setting up an SMSF.

Property developers may have a pre-existing business relationship with the professionals they recommended. They may receive a referral fee or other benefits that could amount to thousands of dollars.

Don’t be pressured into making property purchase decisions for an SMSF. Watch out for sales tactics like competitions, free flights to sales meetings or being taken out for free meals. Make sure you get financial advice from someone who has an AFS licence. See questions to ask a financial adviser for talking points you can use to check for sales incentives.

Think twice about investing in property markets you are not familiar with, do your own research first.

Related links

Are you prepared for any decisions that need to be made when something happens?

An ageing population coupled with the sweeping changes to the aged care system, means that advice services targeted towards the elderly have never been more in demand.

With over one million Australians already receiving aged care services in Australia, and this figure expected to rise to $3.5 million by 2050, demand for advice on aged care is rapidly rising. The 2017 Investment Trends SMSF Report highlighted that aged care is already a significant gap in the advice market, with only half of all retired SMSF trustees having planned for aged care.

Dementia is the leading factor for requiring aged care services and the statistics for dementia are high amongst the 85-and-over age group. Aged Care Steps technical manager Natasha Panagis says a new case of dementia occurs every six minutes based on statistics from Alzheimer’s Australia. Amongst those over the age of 85, 30 per cent suffer with dementia, and this is the typical age for entering aged care, she says.

“Advisers without an aged solution may fall behind as the population continues to age, and people need aged care advice along the way,” she warns.

With greater numbers of Australians needing to access these sorts of services, speaking to clients early on is critical, she says. SMSF practitioners should check that clients have their retirement planning sorted, their estate planning in place and that they’re prepared for any decisions that need to be made when something happens.


Ensuring clients have valid documents in place for wills, enduring powers of attorney and enduring guardianships is important for clients of all ages, says Ms Panagis.

“When the time comes, the client will need to delegate their financial decisions to someone else, and it’s easier if those types of attorneys and guardianships are in place because once they’ve lost legal capacity, it’s too late to set up those powers,” she explains.

“[If these powers are not set up] then their love ones will need to go to the guardianship tribunal of the state and try and seek financial management orders which can be time consuming and quite expensive.”

It’s never too early to address this with clients and put in place documentation because it’s uncertain what might happen in the future, she warns.

“Although most people who are in aged care are in that older age bracket, we’re starting to see a lot of younger clients that need to move into aged care. By younger I mean people in their 60s and some people even in their 40s as a result of a very traumatic accident or injury.”

For SMSF clients specifically, Ms Panagis says practitioners will need to make sure that their trust deed allows for an enduring power of attorney to become their legal personal representative and assume the trustee role or become a corporate trustee.

“It’s also about making sure that the enduring power of attorney is the right person, can be trusted, has the client’s best interests at heart, and will do the right thing by the person,” she stresses.


SMSF clients she says also need consider what will happen with their fund as they become older.

“If they’re getting older and the administration side of things is becoming all too hard, then they can bring other members into the fund and move their benefits out, or they might want to wind it up and just for simplicity move to a wrap-type product or a retail fund,” she explains.

SMSF clients may choose to bring family members into the fund for estate planning reasons, where they want to keep everything within the family unit.

“It comes down to what their objectives are and whether they are happy to bring in other members of the family,” she says.

In some cases there might be an elderly couple where one of the members has dementia and needs to move into aged care.

“If they’re individual trustees, then in that situation, unless they have a corporate trustee, they really can’t remain a single member fund,” she says.


Retirement villages

For clients who want to retain their independence but want the peace of mind of having someone on call in the case of an emergency, retirement villages can be a good option for retirees. TressCox Lawyers partner Christopher Conolly explains that retirement village accommodation is for anyone retired or over the age of 55 and is regulated by legislation in each state.

“They’re not required to provide care, but they are required to provide an emergency buzzer and someone who can respond to that,” says Mr Conolly.

There are a range of different providers and there can be substantial variations in cost depending on factors such as location and the quality of the unit.

“In NSW there’s a standard agreement for retirement village units which is prescribed by the Retirement Villages Act, but there’s usually additional clauses relating to the specific retirement village,” he says.

For clients who are considering moving to a retirement village, there are a number of financial aspects to consider.

“It will be a considerable investment because it is the equivalent to purchasing a new house. The financial planner will need to help the client figure out what assets they have available and how to fund it, and what will happen when the individual leaves the village,” he explains.

Residential aged care

Unlike retirement villages, retirement homes are funded by the government and provide a number of levels of care. The aged care system, Mr Conolly explains, is needs-based so individuals have to establish their need before they can access the funding for care services.

“You can’t go into an aged care facility unless you require it, so you might be immobile for example, or need 24-hour nursing care or suffer with dementia. All of those things qualify you for aged care,” he says.

Individuals who want to enter an aged care facility will need to go through an assessment process, he says, which involves a member of the aged care team visiting the person and undertaking a review of their ability to function. Based on that review they will then make a classification.

The costs associated with residential aged care are split into two parts, the cost of the accommodation and the ongoing fees for aged care.

Challenger technical services manager Sean Howard said if clients are looking in the metropolitan areas for aged care, then the average priceof accommodation will be around $350,000.

“That’s just to move into a facility, it doesn’t include ongoing care, that’s just to get into a room,” explains Mr Howard.

In wealthier areas like the eastern suburbs of Sydney, the average accommodation cost is closer to $2 million, he warns.

On top of this there is also a basic care fee that everybody pays, which works out to be around $50 a day, he says, and if the client has the means, they’ll pay additional fees in addition to this.

“If you want extra services on top of the care, things like wine with your meals or hairdressing, then you pay an extra services fee as well.”

Home care

In recent years, the government has placed a lot of emphasis on providing support for older Australians to continue living at home, says Mr Conolly.

“That’s provided as support packages for personal care, transport, food and preparation of meals, and nursing assistance at home,” he says.

Ms Panagis says home care tends to replicate the services that someone would receive in aged care, but in the comfort of their own home.

“The government encourages people to stay in the home for much longer because it’s one-third of the cost when compared to aged care, by way of all the subsidies that they pay for people,” she says.

“They need an assessment to be able to receive home care services and that will require someone coming to the home to undertake an interview where they ask questions about their lifestyle, what they’re struggling with around the home, and based on that assessment the team will determine whether the person is approved for basic, low, intermediate, or high care.”


Funding aged care

With the cost of accessing aged care services substantial, it’s important to plan how these amounts will be funded well before the need arises.

“A lot of advisers may not consider aged care as part of the retirement planning process. So

when they’re asking clients how much they need for retirement, a lot of the time that amount that they’re helping clients plan for doesn’t include what the aged care costs will be at that time,” says Ms Panagis.

One of the aspects that may need to be considered is how the client will fund the lump sum for their residential aged care accommodation. There has been a fair bit of change in this area in relation to means testing for aged care fees and Centrelink for pension purposes.

“In the past, there were concessions so that if a person kept their home and rented it out and paid their accommodation periodically, then rental income would be offset for Centrelink pension purposes as well as aged care fee purposes,” Ms Panagis explains.

“From 1 January this year it all got tightened up. So, for people who are keeping their home and deciding to rent it out, regardless of how they pay for their accommodation for aged care, that rental income will now count as income for aged care fee purposes and Centrelink pension purposes.”

In the past, advisers and their clients were less likely to consider selling the home, because the rental concession came along with it.

“However, these days, people are actually considering selling the home as an option because renting it out doesn’t carry the same concessions as it used to,” she says.


Some clients may not want to sell the family home if it’s been in the family for the past 60 years, for example, or they want to leave it to the next generation.

If the majority of their wealth is tied up in the home, however, then the practitioner will need to consider other options with the client for funding their accommodation. One option for clients in this situation, Mr Howard explains, is for the client to borrow money for the accommodation from the provider and pay for their accommodation as a daily payment, instead of paying it as a lump sum.

“Essentially what happens is that you pay an interest-only loan to the provider, the interest rate on that is currently 5.7 per cent so that’s another way of funding your accommodation,” he says.

Another way of funding the accommodation is through an aged care loan where the individual borrows a lump sum against their home and uses that to pay for their accommodation. In order to compare which option is best for the client, practitioners should look at the interest rate of each type of loan.

“Keep in mind of course that the interest rate with the provider is 5.7 per cent. So unless the aged care loan has an interest rate lower than that, then you’re probably better off borrowing from the provider because it’s simpler and you’re just dealing with the one party.”

The client may also consider asking family to chip in, says Ms Panagis, if the family home is going to end up going to the family anyway.

Practitioners will also need to consider how clients are going to fund their ongoing care. The means testing for aged care fees consists of two tests.

“There is an income test and an assets test and they add the two tests together to work out how much you need to pay for your aged care,” Mr Howard explains.

“Now that’s a little different to Centrelink. There’s an income test and an asset test for Centrelink but they only use one of the tests, it’s the test that produces the lowest amount of Centrelink entitlement.”

In terms of the income and assets assessed, aged care uses the same assessments as Centrelink with a couple of additions.

“On the income side they also assess what Centrelink pays to the client, so there’s an additional amount of assessable income,” he says.

“Now on the asset side for aged care, once again they use Centrelink assessed assets, but they also assess the family home. Now that’s capped at about $163,000 if there is no protected person living in the home. A protected person could be a partner for example.”

What they also assess for aged care, which they don’t assess for Centrelink, he explains, is the lump sum amount they paid for their aged care accommodation.

Based on this means assessment, Mr Howard says the client may have to pay the means tested care fee in addition to their basic care fee. They may also choose to pay extra fees for additional services.

There are a range of options for funding these ongoing care fees. The most obvious and simplest method is to leave everything in bank and term deposits and draw down on the interest and capital to pay for the ongoing care. With interest rates relatively low for cash at the moment, however, they may also want to explore other options for generating income.

One of the strategies practitioners may want to consider with clients is staggered annuitisation.

CommInsure head of annuities George Lytas said this strategy involves buying tranches of annuities gradually throughout retirement, rather than investing the whole amount upfront.

The first tranche of lifetime annuity the client purchases might comprise 50 or 60 per cent of the amount they want to allocate to annuities, he explains.

“So, regardless of how long you live, you’re getting guaranteed income for life, but what this also means is that you can then purchase additional tranches later on because you haven’t used the whole 100 per cent that you’ve allocated to lifetime annuities,” he says.

The advantage of this strategy, he says, is that it can help the client generate increasing levels of income as their spending patterns change throughout retirement.

“The other benefit of this strategy is that if your circumstances do change and you need to access funds for aged care, because you haven’t allocated all of the money upfront into lifetime annuities you can then access that capital. So it’s actually quite a flexible strategy,” he says.

“So if your health is perfect, then you can continue buying lifetime annuities for example every five years. If your health changes, however, or your circumstances change, then you might say ‘well my income needs haven’t increased as much as I thought, so I don’t need to buy additional lifetime annuities’, and you can cash out your short-term annuities, and use that capital for other needs.”

Insurance bonds can also provide a flexible way of generating income, especially for those without any superannuation.

“Insurance bonds are simple tax-paid investments that allow you to set up automatic regular withdrawals,” he explains.

“If you’ve held those for 10 years, the income that you draw out is actually tax paid, and the other benefit is that you don’t have to complete tax returns because it’s a tax paid investment.”


When providing advice to older clients, its also important that SMSF practitioners are always on the lookout for cases of elder abuse, warns Protecting Seniors Wealth chief executive Anne McGowan.

SMSFs have always been a target for elder abuse by unscrupulous family members or professionals, she says, due to the large balances sitting in some SMSFs and the fact that it’s a growing pool of money.

“As people age and become older, they become reliant on people to assist them, and those people who are genuinely assisting older people should be commended, and there are so many people that do, but there is a growing number of people with ‘inheritance impatience’ and they’re most often the family members,” she cautions.

The introduction of the recent superannuation reforms, she says, has increased the risk of elder abuse because there’s likely to be greater amounts of money sitting outside of the superannuation environment.

“With the new laws coming in, SMSF members can only keep a certain amount of money in pension phase, and then the rest will have to be relocated to other investments. So that in itself will also leave them open to financial abuse, because it may be easier for financial predators to access those other funds,” she explains.

Some of the red flags that advisers should watch out for she says are unusual withdrawals occurring frequently where there’s no explanation or one very large withdrawal. A different person appearing with a new power of attorney when someone else had been helping them previously could also be a sign, especially if the older client appears uneasy around them.

“SMSF advisers certainly need to be very aware of the many different ways that financial abuse occurs and just to be on the lookout for it,” she says.

Source: https://www.smsfadviser.com/latest-issue/feature-articles/17205-golden-years

SMSF Association calls for overhaul of TRIS rules

The government should allow transition to retirement income streams to convert to account-based pensions upon a condition of release, with the existence of two types of TRISs causing unnecessary complexity and compliance, says the SMSF Association.

In a pre-budget submission, the SMSF Association said that while it supports the recent amendments made by the government in respect of TRISs, there are still two types of TRISs — one with taxable earnings and one without — which make the law complex.

“An extension of this is that one type of TRIS will count towards the transfer balance cap, while the other will not,” it explained.

The submission also highlighted that the legislation also creates no real incentive for individuals on a nil cashing TRIS to ever convert to an account-based pension (ABP). In practice, these income streams will continue in the industry in more prevalence than ABPs.

“If an individual did want to convert to an ABP, they would have to do this via the method of commutation and re-commencement, and thus the amendment does not ease the compliance burden they normally face,” it said.

Having three types of pensions also creates additional complexity for the superannuation industry, the submission said.

“SMSF software and service providers must calculate the tax on differing TRISs and collect additional information on conversion date. Financial advisers will have additional burdens in determining the types of TRIS a client has when an adviser gains a new client or an existing client starts a TRIS,” it said.

“Moreover, the disclosure documents seeking to explain the difference between the three types of pension are very complex and lengthy. Actuaries will also need to determine types of TRIS and if a condition of release is met.”

The SMSF Association recommended amending the Superannuation Industry (Supervision) Regulations 1994, so that where a TRIS holder satisfies a nil cashing restriction condition of release their TRIS, they can automatically be converted to an ABP upon an acknowledgement from the member.

“This allows existing TRIS to still be grandfathered for Centrelink purposes if they started before 1 January 2015, as the income stream will not have ceased.

“Furthermore, having members decide when their TRIS converts will also allow them and their advisers to better plan for the transfer balance cap and various other retirement issues and also gives them control. This is an essential aspect of the new superannuation reforms.”

The submission also called for the government to remove the requirement to obtain an actuarial certificate when the fund is 100 per cent in retirement phase.

Under the current rules, the submission said that if an SMSF has at least one retirement phase income stream at any time of year, and a fund member has a total superannuation balance over $1.6 million immediately before the start of the relevant income year, then the SMSF will have disregarded small fund assets.

This means that it will need to use the proportionate method to calculate exempt current pension income for all members for the entire income year.

This requires the SMSF trustee to obtain an actuarial certificate that certifies the proportion of income that is exempt, it said.

“However, one possible outcome of this rule may result in a fund which is solely in retirement phase for a financial year being required to obtain an actuarial certificate in order to claim ECPI,” it explained.

“The actuarial certificate in this circumstance would state an actuarial tax-exempt percentage of 100 per cent.”

The submission said that this is an “unintended and costly consequence” of the disregarded small asset rules which provides no value to SMSF trustees.

“The requirement to obtain an actuarial certificate to confirm that all the fund’s income is exempt from tax when all the assets of their fund are supporting pensions is unnecessary,” it said.

The submission said that a simple fix to ensure that any fund that is in 100 per cent retirement phase is not required to obtain an actuarial certificate could be achieved by amending section 295-385 item 7 to ensure that disregarded small fund assets are not segregated current pension assets, unless section (4) applies in respect to an entire financial year.

“This will save SMSFs in this position the annual actuarial fee, which is typically between $100 and $200 and not impact government revenue,” it said.

The SMSF Association also called for an amnesty to allow SMSF trustees to convert their term allocated and legacy pensions to account-based pensions, a repeal of the work test and changing the residency rules for Australian superannuation funds that unfairly impact SMSFs.

Source: https://www.smsfadviser.com/news/17347-association-calls-for-overhaul-of-tris-rules

ATO to contact members about deductions for contributions

The ATO plans to contact around 11,000 taxpayers in February about claiming deductions for personal super contributions to ensure they claim correctly.

Earlier this year, the ATO reminded professionals about some of the common errors that can arise when clients claim deductions for personal super contributions.

Before lodging the client’s 2018 tax return, the ATO said that practitioners should check that their client is eligible to claim and that they made personal (after tax) super contributions directly to their super fund before 30 June 2018.

In order to be eligible for deductions on contributions made on or after 1 July, the contributions cannot have been made to a Commonwealth public sector superannuation scheme in which the client has a defined benefit interest, a constitutionally protected fund, or a super fund that notified the ATO before the start of the income year that it had elected to treat all member contributions as non-deductible.

The client also needs to meet the age restrictions. Clients aged between 65 and 74 may be eligible to use this strategy if they meet the work test.

Practitioners also need to ensure that their client has sent a notice of intent to claim or vary a deduction for personal super contributions to their super fund and has received an acknowledgement.

It also noted that members can only claim deductions for their after-tax personal super contributions and not from before-tax income such as the superannuation guarantee, salary sacrifice or reportable employer super contributions shown on their payment summary.

Source: https://www.smsfadviser.com/news/17344-ato-to-contact-members-about-deductions-for-contributions

Bill to increase SMSF member limit enters Parliament

The government has now introduced the bill to increase the SMSF member limit, but with the Labor Party unlikely to support it, the measure is still very much “up in the air”, says a technical expert.

In the lead-up to the federal budget last year, the government announced plans to increase the limit on the number of members allowed in an SMSF from four to six.

The government has now introduced Treasury Laws Amendment (2019 Measures No. 1) Bill 2019 containing the measure to change the SMSF member limit into the House of Representatives.

The bill makes amendments to the SIS Act, ITAA 1997 and Superannuation (Unclaimed Money and Lost Members) Act to increase the maximum number of allowable members in SMSFs from four to six.

SuperConcepts general manager of technical services and education Peter Burgess said that it was not surprising that Treasury has gone straight to introducing this measure into Parliament without first releasing draft legislation or a consultation paper given the time constraints.

The amendments contained in the bill seek to retain the same legislative concessions, exemptions and modifications that currently apply to SMSFs by omitting the term “fewer than 5” and replacing it with the term “fewer than 7” throughout the SIS and Tax Act, he explained.

“In other words, the proposed amendments contained in the bill seek to ensure the continued alignment with the increased maximum number of members for SMSFs,” he said.

“In particular, the amendments update the sign-off requirements in section 35B of the SIS Act to ensure at least half of the directors or individual trustees are still required to sign off the fund accounts and statements.”

Once the bill has been passed, Mr Burgess said that amendments to the SIS Regulations will still be required to accommodate these changes to the act.

“For example, SIS Regulation 13.22C and 13.22D are two regulations which come to mind that will need to be amended,” he said.

Mr Burgess also noted that, in some instances, the number of individual trustees that a trust can have may be limited to less than five or six trustees by state legislation and such rules could prevent all members of a fund with five or six members from being individual trustees.

“The explanatory materials say that in these situations a fund may consider using a corporate trustee to overcome this issue,” he said.

It is still uncertain whether Labor or the minor parties will support this measure, he said.

“In my view, it’s not a measure that the Labor Party would be inclined to support, so whether or not this measure is passed into law before the election is called is still very much up in the air,” Mr Burgess said.

The measure to increase the total SMSF members allowed to six has gained appeal among SMSF members following Labor’s announcement that it would scrap cash refunds for franking credits.

Some trustees plan to invite adult children with accumulation accounts into their fund so that they can increase the taxable income of the fund and offset franking credits.

SMSF members have also been warned on some of the investment risks and estate planning complicationsthat can arise from bringing extra members into the fund.

Source: https://www.smsfadviser.com/news/17340-bill-to-increase-smsf-member-limit-enters-parliament

Franking credit proposals prompt spate of buy-backs, dividends

The proposed changes to franking credits are predicted to trigger a wave of buy-back announcements and other shareholder returns over the next few weeks, providing a boost for SMSFs and other retirees, says an investment manager.

AMP Capital portfolio manager, equity income, Dermot Ryan said that, over the next four weeks, many of Australia’s biggest companies will report their half-year results and the combination of strong balance sheets and cash flows, late-cycle business strategies and the prospect of Labor’s franking credit changes is expected to see boards hand back money to investors in a tax-efficient way.

Mining, utilities, energy and consumer companies are the sectors most likely to announce buy-back schemes or other shareholder returns, he said, “providing a bountiful one-off boost for many self-funded investors and retirees”.

“These sectors are in robust health from a cash flow and balance sheet perspective. Some have been bolstered by the sale of non-core assets. They have excess capital over and above what they need to invest in their businesses,” he said.

“Many companies from these sectors have paid large amounts of tax in Australia, generating precious franking credits for investors.”

Within the mining sector, management are looking to maintain current production levels at lower unit costs rather than expanding production.

“[This] means the cash flows from current projects can be returned to shareholders rather than used to fund new projects,” he said.

Mr Ryan said that company boards are aware that the value of franking credits amassed on balance sheets may be at risk if Labor wins the upcoming election.

In terms of returning the money to shareholders, companies have a few options, including increasing interim and final dividends, paying a one-off special dividend, or launching a share buy-back program.

“In an off-market buy-back, the company offers to buy shares back from willing sellers at a discount to the trading price, plus pay a special dividend to make up the difference. These dividends come with franking credits which are attractive to many investors,” he said.

An on-market buy-back, on the other hand, is where the company buys back its shares on a first-come, first-serve basis at the market price, without a special dividend.

“Buy-backs are most attractive to shareholders on low marginal tax rates who can offset excess franking credits against other income or take the excess credits in cash. This is particularly attractive to retirees who pay no tax in the pension phase of their investing,” he explained.

Source: https://www.smsfadviser.com/news/17341-franking-credit-proposals-prompt-spate-of-buy-backs-dividends


New auditor tool launched for title searches, ASIC extracts

Audit software firm Cloudoffis has announced a new integration with a technology company that will allow auditors to automatically access title searches, ASIC extracts, corporate trustee searches and background checks.

Cloudoffis has integrated with technology firm InfoTrack, allowing SMSF auditors to request corporate trustee ASIC searches through the Cloudoffis platform, which are then automatically stored for quick access.

They will also be able to instantly order ASIC extracts and attach them directly to the audit.

The integration will also enable users to access title searches, background checks and know your customer checks. Searches can be performed directly through Cloudoffis with the results and related costs returned to Cloudoffis and added to the auditor’s subscription.

Cloudoffis has also improved its integration with BGL so that users no longer need to manually upload operating statements, financial statements and investment summaries.

Source: https://www.smsfadviser.com/news/17337-new-auditor-tool-launched-for-title-searches-asic-extracts

The new event-based reporting regime is set to commence from 1 July 2018.

The new event-based reporting regime is set to commence from 1 July 2018. What preparations do firms need to make and what are some of the overlooked traps?

Transfer balance account reporting has been one of the most contentious and divisive issues for the industry in the past year. The ATO initially proposed that all SMSFs would report credit and debit amounts for the transfer balance cap no more than 10 days after the month in which they occurred, and the commencement of income streams no more than 28 days after the end of the quarter in which they were commenced.

These proposals were soon met with intense criticism and lobbying from parts of the SMSF industry, with many firms ill-equipped to deal with the frequency of the proposed time frames.

Following the negative reaction from industry, the ATO revised its position, adjusting the reporting time frame for all events to a quarterly basis, and limiting the new reporting requirements to members with account balances of at least $1 million only.

This means that from 1 July 2018, SMSFs that have members with a total superannuation balance of $1 million or more will be required to report events impacting a member’s transfer balance cap within 28 days after the end of the quarter in which the event occurs.

At time of writing, the ATO has suggested that the $1 million threshold amount will be based on the total superannuation balance of the member on the 30 June immediately prior to the commencement of that income stream. ATO assistant commissioner Kasey Macfarlane says the ATO is also proposing that in situations where one SMSF member has a total super balance greater than $1 million and others in the fund have a total super balance less than $1 million, “the SMSF will report all events for all members 28 days after the end of the relevant quarter”.

“We think its appropriate to apply it at the fund level like that, to avoid administrative complexities of SMSFs and their advisers having to work out different methods and different reporting time frames,” explains Ms Macfarlane. She also stresses that where a member’s superannuation balance falls below the $1 million threshold during a financial year and they were previously above it, they will not be able to switch to annual reporting in that year.

“That approach is being taken to avoid administrative complexity of people going in and out of annual and quarterly reporting, creating difficulty for advisers and administrators,” she says.


The TBAR reporting regime will affect some SMSFs significantly depending on the size of member balances and the strategies employed, while other SMSFs will see very little impact at all. Despite the extension to the time frames in which funds need to report, quarterly reporting still represents a significant transition from the current rules, where transactions can be reported nearly two years after they occur.

The introduction of the superannuation reforms is likely to lead to an increase in SMSF pensioners who draw more than their required minimum performing additional commutations to maintain room under their $1.6 million cap for extra contributions. Class chief executive Kevin Bungard explains that these additional commutations would of course be reportable events for those members with balances exceeding $1 million. This is likely to become a popular strategy, he says, because it enables clients to add more space back onto their transfer balance cap.

“If it’s a material amount [above the minimum pension], you would look to make sure that you get the credit back onto your cap, so that the client has that additional cap space later on,” he says.

Analysis by Class indicates that around 39 per cent of pensioners drew down at least $5,000 more than the minimum on their pensions during the 2016 financial year.

SMSF Academy director Aaron Dunn agrees that this will be an important strategy from 1 July, but says SMSF practitioners will need to contemplate the timing of when information about these commutations needs to be reported to the ATO.

Another strategy which could attract a higher rate of reportable events is rebalancing the balances between different members in a fund, explains Mr Bungard.

“SMSF members may choose to even up the balances between different members in a fund by taking money out and re-contributing it to the other member and then restarting the pension,” he explains.

“That’s a strategy that’s going to require a level of reporting, especially when you consider that given the caps, it would potentially take someone a number of years to execute that kind of strategy to try and even out the balances.”

One of the other main implications of event-based reporting is that it’s going to be much more difficult to backdate strategies and documents, warns BGL Corporate Solutions managing director Ron Lesh.

“In the past, SMSF practitioners might have backdated the commencement of pensions by 12 months and if they didn’t have to pull any cash out, then that wasn’t a problem,” Mr Lesh explains.

“So they’ll now need to make those types of decisions earlier. So, instead of sitting down at the end of the year, and saying ‘okay, we should have started a pension at the beginning of July, so let’s do that’, they’ll have to report it for the quarter that they started the pension.”

Colonial First State executive manager Craig Day says this inability to backdate documents as a result of the reporting needs to be carefully considered where SMSF practitioners are executing strategies that involve commuting amounts that were paid above the pension minimum.

“You need to actively commute an amount out of your income stream. So you won’t be able to wait until the end of the financial year, and then look at the total amount you had withdrawn from your income stream and then decide that any amounts over and above the minimum will be treated as lump sums,” he cautions.

“You need to be proactive about that and decide that was what you were going to do at the beginning of year.”

If SMSF advisers do decide to recommend a commutation, he says, then they need to get the paperwork and documentation for it sorted upfront.

“It’s not something that should be done in retrospect at the end of the financial year.”


For some SMSF firms, particularly those that are still processing client funds manually  preparing for the event-based reporting regime may require moving to new SMSF administration software systems and updating their technology.

Mr Lesh says SMSF firms will need to automate the process of collecting SMSF data.

“Those that are using web-based software will find complying with the requirements a lot easier, those that are not using web-based software will find it a lot harder, and those using no software will find it impossible,” Mr Lesh warns.

A large chunk of SMSF firms, he says, are still only using desktop software rather than cloud-based software, which means they don’t have access to up-to-date information on investments and account balances for their client. He also estimates there could be as many as 100,000 SMSFs that still aren’t using any software at all.

SuperConcepts general manager of technical services and education Peter Burgess says there are already software tools out there that support event-based reporting. These tools generate data files on events for multiple members, which can be uploaded to either the business portal or the tax agent portal.

“So there is an automated solution to this and it’s within the reach of SMSF trustees.”

“Practitioners should look at the automated solutions which are now available because it does make the reporting so much easier,” says Mr Burgess.

One of the most important preparations for the new reporting requirements is educating clients on the details, according to the SMSF Academy’s Aaron Dunn. SMSF firms, he says, either need to put the information about the fund into the hands of the member through cloud-based technology, for example, or there needs to be a communication system in place between the client and the practitioner around when certain money is being moved.

“Those communication pieces are going to become critical, otherwise it does put the member or fund at risk of not reporting within the prescribed time frames,” he says.

The new reporting requirements will also place greater emphasis on client segmentation. Mr Dunn recommends splitting clients into three separate groups; clients with balances above $1 million, those with balances close to $1 million and those that are well below $1 million.

“For the clients above the $1 million, practitioners may need to be more strategy-focused in terms of how those benefits may be taken out if they’re contemplating partial commutations and so forth, versus those under the $1 million.”

SMSF practitioners should then look at clients in the threshold risk area.

“It’s going to be based on the total superannuation balance each year so these clients may slide in and out of the system so you’re going to need to be active in terms of the management of those [funds],” he explains.

The third group, he says, will comprise of the lower risk clients who are unlikely to ever reach the $1 million. SMSF practitioners, he stresses, will still need to think about the fact that these clients may exceed the threshold for quarterly reporting upon receiving a death benefit, however.


While the ATO’s revised position on event-based reporting may have been a welcome relief to the industry, it also means that SMSFs are now out of step with the rest of the superannuation sector. This misalignment means there is the potential for excess transfer balance determinations to be issued by the ATO, warns Mr Burgess.

“So whenever an SMSF member that’s in the pension phase commutes that pension, rolls it over and starts a pension in an APRA regulated fund, there is the likelihood of an incorrect excess transfer balance determination being issued by the ATO,” he cautions.

“That’s because the pension balance at 1 July 2017 would be a credit to the member’s transfer balance account for that amount, and then they transfer it to the APRA fund and the APRA fund has to report the commencement of that pension 10 business days after the end of the month.”

The client would therefore end up with two credits for the pension in their transfer balance account which could then result in an excess pension amount and a determination being issued, he says, because the commutation has not yet been reported by the SMSF.

“Now once that determination has been issued by the ATO, the clock is ticking, and if the member doesn’t act on that determination in a timely manner, the APRA fund will be compelled to commute that excess, even though there isn’t really an excess, and so that can create some legwork and extra stress for the client,” he says.

At a minimum, he recommends that SMSF practitioners report any full commutations 10 business days after the end of the month like APRA funds do, in order to avoid this issue arising.

Mr Day says SMSF practitioners should ideally be recording pension commencements and commutations for their clients on an ongoing basis. ATO data can potentially be out-of-date by 22-and-a-half months for clients reporting on an annual basis so it won’t be reliable, he warns. Advisers who aren’t recording this information could therefore be caught off guard where a client receives a death benefit for example.

If a client dies, their spouse may need to commute and roll back an amount of their own pension to accumulation phase, in order to create additional cap space and allow them to receive more of the original member’s death benefit as an income stream, he explains.

“Unless separate records have been maintained, it may be difficult to quickly calculate the value of the commutation required, especially where the client has been commuting additional lump sums from their own pension, which could delay the payment of a death benefit and increase the risk of exceeding their TBC,” says Mr Day.

In these types of scenarios, SMSF practitioners won’t be able to wait the potential 22-and-a-half months for all the reporting to wash through and know how much to commute, he cautions.

“The adviser would actually need to do that relatively quickly so they’d have to go back in and look at the fund’s records, look at all the transactions and figure out which of those withdrawals are pension payments, which were commutations, and then calculate what the actual transfer balance cap for the survivor is, which would then tell them how much to commute,” he says.

“So it could actually get reasonably complicated for a financial adviser, and there is also a time frame in relation to the payment of death benefits which they need to keep in mind as well, so all that work needs to be done reasonably quickly.”

Given that the commencement of a pension is a reportable event, Mr Bungard says practitioners will also need to monitor balances for clients that are at an age where they could potentially start a pension, even if they are still in accumulation phase.

“[So] if the client is at an age where they could start a pension this year, you will need to know what their total super balance was at the beginning of the year,” he says.

Analysis from Class suggests that around 60 per cent of SMSFs have at least one member who is age 60 or older. Class also estimates that approximately 20 per cent of SMSFs have at least one member who is age 60 or over and a member with a balance over $1 million. Mr Bungard notes that the member aged 60 or over may not be the same member with a balance of $1 million or more.

This point was also raised by Ms Macfarlane in November when she stated that it’s not just SMSF members in retirement phase who will be tested against the $1 million threshold.

“All members’ total super balances are tested against the $1 million threshold and are relevant to determine the reporting time frames that apply,” she says.

“The reason for that is it’s not just about money already in the retirement phase, it’s also about money that people hold in super which could potentially be transferred into the retirement phase in the future, and cause an inadvertent or accidental trip over the transfer balance cap.

Source: https://www.smsfadviser.com/latest-issue/feature-articles/16639-time-warp

How much do you need to set up a self-managed superannuation fund?

This is a common question for anyone considering setting up their own superannuation fund.

It is important to note that there is no mandated minimum amount required to establish a Self-Managed Superannuation Fund (“SMSF”). However, the Australian Securities and Investment Commission (“ASIC”) has issued guidelines to financial advisers on this matter which includes the following points:

  • It is important to consider if a client’s likely balance in an SMSF makes it “cost-effective”. If it is not cost-effective, an SMSF is unlikely to be in the client’s best interest,
  • Establishing an SMSF with a balance of less than $200,000 is not likely to be cost-effective – this is based on a 2013 study by Rice Warner which indicated that the average cost of a superannuation account in Australia was just over 1%,
  • There may be circumstances where starting a fund with less than $200,000 would be in the client’s best interest – for example, where the trustees are prepared to take on as much of the administrative work as possible or when members plan to roll in additional funds in the short term from say another fund or sale of a business.

All savings/investment plans have to start somewhere. Costs are not the only consideration as investment returns are likely to have a much greater effect on fund balances over time. The particular circumstances and plans of the individual/s concerned will be critical to the decision to set up an SMSF and are a far more important consideration than any arbitrary dollar balance.

Take for example the following cases:

Case 1

Bill has operated a very successful small business for many years and has considerable cash reserves but only a modest superannuation balance of $60,000. After taking appropriate advice and undertaking some financial planning, he decides to establish an SMSF. He rolls his existing $60,000 into the SMSF to start it off and then has a plan to make maximum contributions to the fund over the following years i.e. currently $125,000 per annum. He has very particular views on how his retirement savings should be invested. Even though Bill would not make the $200,000 “threshold” for at least a couple of years, the establishment of an SMSF is clearly justifiable based on Bill’s requirements and future plans.
Case 2

Ann has operated a beef cattle business with her husband for more than 30 years and tragically lost her husband in a farming accident. They have no superannuation and after taking advice, Ann decides to establish an SMSF with an initial small cash amount and then prepare the farm for sale with the aim of making a maximum Capital Gains Tax contribution from the sale proceeds. The sale is expected to be at least a couple of years away but Ann wants to get everything in place while she has the help of her only daughter who is due to go back to her overseas employment in the next few months. Again, not meeting the initial $200,000 threshold can be seen as irrelevant to Ann’s longer term interests.
Case 3

Ben and Josie have just been given some of the family farmland to start their own sheep and cattle business. In conjunction with their accountant and financial planner, they have mapped out a medium-term financial plan which includes significant superannuation contributions. They are likely to have variable incomes but aim to be consistent with their contributions and to make significant additional contributions in the better years. They are keen to be involved in the running of the fund and take a close interest in the performance of their investments.
Whilst there is no hard and fast rule for a minimum amount required to justify setting up an SMSF, it is important that the personal circumstances and plans of the individuals concerned be carefully considered and professional advice sought from experienced and licensed professionals.

For any adviser to recommend the establishment of an SMSF to a client, it should be clear that such an action is demonstrably in the client’s best interest. This applies regardless of the amount of the planned initial investment in the fund.