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‘3 strikes and you’re out’: ATO eyes 80,000 late SMSF returns

The ATO has launched a new compliance campaign aimed at driving the lodgement of SMSF annual returns as it chases 80,000 late returns.

Speaking at the SMSF Association National Conference 2021, ATO assistant commissioner, SMSF Segment, Justin Micale said that while the illegal release of super in SMSFs is a continued concern for the ATO, a stronger focus will be placed on the non-lodgement of SMSF annual returns.

Mr Micale revealed that even with the due date for lodgement of the 2019 SMSF annual return being deferred until the 30th of June 2020, the ATO is tracking around an 86 per cent lodgement rate.

“This means that there are still around 80,000 funds yet to lodge this, so we’ve still got some work to do in this area,” he said.

“We understand it’s been a difficult time and we want to help you where your clients have run into difficulties.

“Our message for this group is simple: if you are experiencing difficulties with lodging outstanding returns, contact us and we’ll help you get back on track.”

While there are many reasons for an SMSF to stop lodging, including people experiencing difficulties as a result of COVID-19, Mr Micale noted recent ATO data also showed that lapse lodgement is often an indicator of broader regulatory issues.

“We’ve found that where an SMSF has an unrectified regulatory contravention in a prior year, they often fail to meet their lodgement obligations in subsequent periods,” he said.

“In recent years, there’s also been an increase in the number of new SMSFs established that failed to lodge their first SMSF annual return.

“This is particularly concerning where we can see a subsequent rollover into this SMSF, as this is a strong indicator that an illegal early release may have occurred.

“Non-lodgement and illegal early release go hand in hand, so you can see why we have a strong focus in these two areas.”

Mr Micale said the ATO will ramp up its messaging about the importance of lodging on time and will be starting a communication campaign where a series of letters with escalating warnings will be issued.

“I suppose you could call it a three strikes and you’re out campaign,” he said.

“Our new approach is to firstly help and support trustees. Our initial blue letter will let them know they are required to take action and lodge their return.

“If we don’t get a response to this letter, we’ll issue an orange letter warning of the potential consequences of not lodging their return.

“This includes imposing failure to lodge penalties for all overdue years, raising default assessments for each year of non-lodgement with penalties of up to 75 per cent, issuing a notice of non-compliance and/or disqualifying the trustee.”

Mr Micale said if the ATO still doesn’t get a response, then it will issue the final red letter which is basically a show cause letter instructing the client to tell them why they shouldn’t be subject to any of the consequences as outlined in the previous letter.

“We’ll be reasonable in our approach to this. For instance, if trustees respond to the issuing of a notice of non-compliance by promptly lodging all over SARs and committing to lodging future SARs on time, we’ll consider a vote revoking this notice,” he said.

“It’s important for us to protect SMSFs that are doing the right thing, so we are very serious about getting on top of this lodgement issue.”

Source: SMSF Adviser

ATO outlines guidance on reporting obligation impacts from COVID-19

The ATO has outlined the impacts from COVID-19 on reporting obligations for SMSFs and guidance on the changes ahead for the 2020–21 financial year.

Previously, the ATO drafted additional instructions for SMSF auditors which provide guidance and examples on what types of COVID-19 relief may give rise to contraventions and which ones to report to the commissioner.

Speaking at the SMSF Association National Conference 2021, ATO director Kellie Grant outlined a comprehensive guide on the requirements for the independent auditor’s report (IAR) and auditor contravention report (ACR) across the different measures that were impacted by COVID-19.

For rental relief measures and confusions around section 65 breaches, Ms Grant said, obviously, if the trustee applies that on arm’s length terms then there could still be a section 65 breach, but there obviously won’t be an in-house asset breach if it’s provided to a related party on arm’s length terms but there could still be a section 65 breach because it is indirect financial assistance.

“We wouldn’t expect that, of course, to be qualified in the independent audit report because it’s not really considered material and we’ve also said in our ACR agenda we wouldn’t expect that to be reported,” Ms Grant said.

“We have had a number of auditors ask us about the question around section 65 contraventions and we do have a ruling though in place that says in situations like this, even outside the COVID situation, there would be this indirect financial assistance, so I think it is important here for us to continue with that view, but we’ve tried to make it easier reporting-wise saying it’s not reportable.

“Obviously, if that rental relief is provided on non-arm’s length terms then the auditor will be looking at section 62, 65, 84 and 109 breaches and then qualifying the audit report if it’s material and then lodging an ACR if it meets that reporting criteria.”

Addressing the contraventions around the in-house asset relief, Ms Grant said this is a situation where you know the fund might get to the end of the 2020 or even the 2019 year and has an in-house asset above that 5 per cent threshold but due to COVID can’t dispose of it by the end of the following income year.

“In that situation, we’ve said if you can’t dispose of it because of COVID, we won’t look to take compliance action, but we do expect you to still prepare a written plan, and in that situation, there’s probably likely to be an in-house asset breach and if it is material you need to qualify the audit report, but we have said in that situation you don’t need to report it to us in an ACR,” Ms Grant said.

Ms Grant said that with the early release on compassionate grounds, in that situation if the auditor can see that the trustee has a copy of the termination and has released it in one lump sum after the determination date, there shouldn’t be any contravention.

“However, in a situation where they’ve released that amount before receiving a determination, then, of course, you are looking at your section 62, 65 regulation and SASR 508 regulation contraventions qualifying the IAR if the material and an ACR is required if the reporting criteria are met,” she continued.

“Of course, with that measure, funds do need to release that amount once they get the determination as it says as soon as practicable and they need to release it in one lump sum.

“Now we realise though that there’s going to be some trustees that might get that determination and hopefully their financial situation has changed, they might decide they don’t need to no longer release it.

“In that situation, we wouldn’t expect the auditor to report a contravention and also if it’s released in a couple of withdrawals (although it shouldn’t be), we’re not too concerned about you reporting that sort of contravention to us as well.”

Ms Grant said the ATO is also looking at modifying the independent audit report to line up with the ACR addendum to say that where you don’t need to report in the ACR, you also don’t need to qualify in the IAR.

“But we did receive a bit of feedback from our auditor group saying they weren’t comfortable though with that even though we’d put it in the instruction,” she said.

“They mentioned they were still signing off though on an unqualified opinion in the audit report to say that all those sections have been complied with, so unless you’re going to change that opinion clause in the IAR, we’re not comfortable with it.

“So, in the end, we did do a U-turn on that to say, ‘Look back to just reporting as per normal in the IAR’.”

Source: SMSF Adviser 

ATO issues reminder on January deadline for TBAR

For SMSFs that report transfer balance account events on a quarterly basis, the next report will be due on 28 January for events that occurred during the December quarter.

In an online update, the ATO stated that SMSF trustees are required to lodge a TBAR by 28 January if a TBAR event occurred in their fund between 1 October and 31 December 2020 and any member of the SMSF has a total super balance greater than $1 million.

“Different reporting deadlines will apply if any of your members have exceeded their transfer balance cap, and we’ve sent them an excess transfer balance determination or a commutation authority,” the ATO said.

“If no TBA event occurred, you do not need to report.”

It reminded trustees that the TBA is a record of all the amounts transferred that count towards their personal transfer balance cap (TBC).

“The most common events you need to report are when a member starts a retirement income stream or commutes that income stream into a lump sum, including when they commute that pension before rolling it over to a new fund,” it explained.

“There is a lifetime limit on the total amount of super that can be transferred into the retirement phase income streams, including most pensions and annuities. This is called the TBC.”

It also stressed that the TBAR is separate from the SMSF annual return (SAR).

“This is one of your trustee reporting obligations and it enables us to record and track an individual’s transfer balance,” the ATO said.

“This is an important aspect of your fund administration because there can be negative tax consequences if a member exceeds their TBC.”

Source: SMSF Adviser

Deadline to amend discretionary trusts fast approaching

lients with discretionary trusts that hold residential land in NSW will need to amend their trust deed to exclude foreign persons as beneficiaries by the end of this month to avoid paying the NSW foreign duty and land tax surcharge.

With 31 December now only a few weeks away, SuperCentral has reminded professionals and clients about the changes in NSW to the Land Tax Act 1956 (NSW), Land Tax Management Act 1956 (NSW) and the Duties Act 1997 (NSW).

The amendments mean that a discretionary trust will be deemed as foreign for the purposes of surcharge land tax and surcharge duty, unless the trust prevents any foreign person from being a potential beneficiary of the trust, which may require amendments to the trust deed, SuperCentral explained.

SuperCentral also warned that while the changes apply to NSW, it is important to note that Victorian and Queensland discretionary trust deeds may be in a similar position as NSW.

 

Earlier this year, Cooper Grace Ward Lawyers (CGW) warned that in order to avoid foreign land tax and duty surcharges, the trust deed needs to be amended before midnight on 31 December 2020 to exclude all foreign persons as eligible beneficiaries, and prevent any amendment to the exclusion of foreign persons as beneficiaries, so that the exclusion is permanent and irrevocable.

“This is the case even if none of the eligible beneficiaries of a discretionary trust are foreign persons,” the law firm stated in an online article.

The trust deed and all the variations should then be submitted to Revenue NSW for confirmation that the trust is not a foreign person, it said.

If a discretionary trust is deemed a “foreign person”, CGW warned that surcharge duty of 8 per cent and surcharge land tax of 2 per cent will be payable on any residential land in NSW acquired or owned by the trust since the surcharges were introduced in 2016.

“This can also be the case where the discretionary trust is a shareholder or unitholder in a company or unit trust that owns the residential land,” it said.

Residential land for these purposes has a wide meaning, the law firm stated, with the surcharges applying to vacant or substantially vacant land (including farming property) that is zoned for residential purposes.

“These new changes apply retrospectively, so that if a discretionary trust paid surcharge duty or land tax but amends its trust deed to permanently exclude foreign persons as beneficiaries before 31 December 2020, the trust may apply for a refund of the surcharge,” it said.

“[However, if a discretionary trust] owns residential land in New South Wales but does not amend its trust deed to permanently exclude foreign persons as beneficiaries before 31 December 2020, the surcharge duty and land tax may apply for prior years since the surcharges were initially introduced in 2016.”

Different transitional rules apply to testamentary trusts, it said.

Source: SMSF Adviser

ATO issues reminder about October TBAR deadline

The Tax Office has reminded any SMSFs that reports transfer balance account events on a quarterly basis that the report will be due on 28 October where they had an event occur in the September quarter.

In an online article, the ATO stated that where a TBA event occurred in a member’s SMSF between 1 June and 30 September 2020 and any member had a total super balance greater than $1 million, the SMSF will need to report the event.

If no TBA event occurred, they will not need to report, the ATO said.

“The TBAR is separate from the SMSF annual return and it enables us to record and track an individual’s balance for both their transfer balance cap and total super balance,” the ATO explained.

“Different reporting deadlines will apply, if any of your members has exceeded their transfer balance cap, and we’ve sent them an excess transfer balance determination or a commutation authority.”

Back in July, the ATO flagged that it was still seeing some significant errors with transfer balance account reporting, with retrospective reporting, duplicated reporting and late reporting listed as some of the ongoing concerns.

“One of the most significant issues we’re concerned about is late reporting and that’s resulting in members being in excess of the cap for longer periods, thereby needing to commute more from their pension accounts or paying more tax,” ATO assistant commissioner Steve Keating stated.

“Members are at risk of having their pension commuted twice, and this might happen if they have both APRA and SMSF pension accounts, where they commute from their SMSF due to receiving a determination from us, but they don’t report that commutation to us.”

Source: SMSF Adviser 

Tax Office gears up for 6-member SMSF bill

The ATO has flagged that if the bill to increase the number of members allowed in an SMSF is passed before 1 July next year, its systems may not be ready in time, but it will look to implement workaround solutions.

Earlier this month, a measure announced in the lead-up to the 2018–19 budget to increase the number of members allowed in an SMSF from four to fix was reintroduced into Parliament, after previously being scrapped prior to the federal election.

The amendments will apply from the start of the first quarter that commences after the act receives royal assent.

The bill was referred to the economics legislation committee on 3 September. The committee is due to report back on 4 November.

While the bill was introduced during the September parliamentary sittings, it is expected to be carried over to the November or December sittings, ATO director Kellie Grant told delegates at the Tax Institute National Superannuation Online Conference.  

 

“If the measure is passed by both houses at that time and receives royal assent, we’ll be looking at a 1 January start date,” Ms Grant said.

“Now, should the law commence before 1 July 2021, our systems may not be ready by that stage, but we will have workarounds in place until those system changes are made to allow up to six members in a fund.”

SMSF trustees and professionals, she said, need to be aware that there will be a period of time where their information may not be readily accessible in the ATO’s systems.

“[They should] also be aware that state-based state law may limit the number of individual members in a certain fund, but of course, that can be overcome by appointing a corporate trustee to the fund,” she said.

Commenting on the bill in an online article, SMSF Alliance principal David Busoli noted that if the measure does become law, the effect of additional members on control and investments will need to be carefully considered.

“Also, due to the Trustee Acts in most states — NSW, Qld, Vic, WA and ACT — a corporate trustee will be required,” he added.

Source: SMSF Adviser 

6-member SMSF bill introduced into Parliament

A measure from the 2018–19 budget to increase the number of members allowed in an SMSF from four to six has been reintroduced into Parliament, after it was scrapped prior to the election.

Senator Jane Hume has introduced Treasury Laws Amendment (Self-Managed Superannuation Funds) Bill 2020 into the Senate this week, which amends the SIS Act, Corporations Act, ITAA 1997 and Superannuation (Unclaimed Money and Lost Members) Act 1999 to increase the maximum number of allowable members in SMSFs from four to six.

The amendments will apply from the start of the first quarter that commences after the act receives royal assent.

The Coalition government first announced plans to extend the SMSF member limit in the lead-up to the 2018–19 federal budget.

Former Minister for Revenue and Financial Services Kelly O’Dwyer said the change would increase choice and flexibility for members.

The measure was previously introduced into Parliament as part of the Treasury Laws Amendment (2019 Measures No. 1) Bill 2019. However, with Labor opposed to the measure, the Liberal Party agreed to remove the amendment to increase the SMSF member limit in order to pass the other measures contained within the same bill.

The measure to increase the SMSF member limit has previously had mixed opinions, with some experts flagging the potential risks that additional members pose in terms of disputes between members and estate planning.

Other SMSF specialists have pointed out that increasing the number of members in an SMSF could raise the risk of members falling victim to elder abuse.

Other commentators in the SMSF industry have supported the measure as it provides larger families with the option of bringing their children into their fund.

Source: SMSF Adviser 

 

Control still key driver for SMSFs

The ability to have personal control over superannuation investments has remained the key driver behind the establishment of SMSFs and concerns they were being used as property investment vehicles was a minor issue, according to research group Investment Trends.

Investment Trends chief executive Michael Blomfield said research conducted for the “2020 Vanguard/Investment Trends SMSF Investor and Planner Report” found control-related issues continued to rate as the leading reasons for the establishment of SMSFs despite an increase in the level of interest in property held within an SMSF since 2015.

“In the year to September 2019, the number of SMSFs continued to grow, but at a lower rate than previous years. There were almost 600,000 funds by September 2019, but only 20,000 were set up in the 12 months before that date,” Blomfield said.

“When we talked about why they [trustees] established an SMSF, control of investments remains the big driver. Control is the number one issue by a long way for all SMSF trustees and behind that we start to get into issues related to better returns and being more tax effective.”

He said the issue of property investment was one he had to “call out” and  despite an increase in investment in property between 2015 and 2020 by SMSF trustees, as a reason for starting an SMSF it “does not get anywhere close to the drivers for control or approach the secondary drivers of better returns”.

He pointed out control was the leading factor for the establishment of a fund for 67 per cent of SMSF trustees, while property investment was the leading factor for around 32 per cent of funds and prior to 2015 was the primary driver for only 15 per cent of trustees.

While SMSF trustees continued to remain strong in their views they can make better investments than an Australian Prudential Regulation Authority-regulated fund, some trustees had hesitated to set up a fund because of regulatory concerns, he said.

“We saw in lead-up to the last federal election there was discussion about franking credits and we were not sure if that drove people to holding back or decreased their interest in SMSFs,” he said.

“Trustees have been telling us for a long time that it is regulatory uncertainty that makes them think twice, or three times, about whether SMSFs are the right place to be, and while we are still seeing growth, we have no reason to believe that has ceased.”

The report was compiled from 3156 trustee responses to a quantitative survey conducted online between February and May and also found a large unmet need for advice from trustees who had not made major changes to their SMSF investments as a result of COVID-19 market downturns.

 

Changes to your super

The recent change to change to the work test for making contributions to superannuation to age 67 has certainly raised issues with clients making contributions after 65 and how those changes impact on any contributions that are being made for them. The downside of the Government’s 2018 budget announcements for superannuation contributions is that the opportunity to use the bring forward rule is still restricted to those age 65 or younger.  

The changes to the income tax law in the Treasury Laws Amendment (More Flexible Superannuation) Bill 2020, which move the bring forward rule to age 67, remain in the House of Representatives. As parliament does not resume until early August, the bill has a way to go prior to becoming law. So where are we now with contributions for anyone 65 or older with the start of the 2020/21 financial year?

Until 30 June, 2020, personal concessional and non-concessional contributions could be accepted by a fund without any work test being met prior to the member reaching age 65. However, once the person reached the age 65 in the financial year the member was required to meet the work test at some time during that year and in all later financial years prior to the contribution being accepted.  

As with personal superannuation contributions, the fund trustee is unable to accept personal concessional or non-concessional contributions any later than 28 days after the month in which the person reaches age 75. There is one exception to the age test which is the acceptance of downsizer contributions.  

The only exceptions to the work test are where a person wishes to make contributions in the year after ceasing work and downsizer contributions.  Ceasing work contributions are permitted to be made on a once only basis after the member has reached 67, previously age 65, in a year after they have ceased work if they have a total super balance on 30 June in the previous year of less than $300,000. These contributions can be accepted by the fund trustee 28 days after the month in which the person reaches 75.

As far as downsizer contributions are concerned, a person and their spouse are eligible to each make a contribution of up to $300,000 within 90 days of selling their main residence after age 65. There is no upper age limit applying to downsizer contributions or any work test that needs to be satisfied.

Anyone who is employed after age 65 may be eligible for compulsory employer contributions and if they meet the work test, they may wish to salary sacrifice to super. 

Employer-mandated contributions, such as those made for super, guarantee purposes or under an industrial award, are not subject to a work test or age limit. However, other employer contributions, including salary sacrifice, are subject to age limits described above.

The changes to the work test requirements have been extended to include non-concessional contributions made for an eligible spouse. The age restriction which applied up to 30 June, 2020, permitted spouse contributions to be made between ages 65 and 70 providing the spouse met the work test. 

From 1 July, 2020, this is now extended to apply for spouse contributions made between 67 and 28 days in the month after the spouse reaches 75 in line with other personal superannuation contributions. The work test is required to be met prior to contributions being made to the fund.

In relation to the operation of the bring forward rule for non-concessional contributions, those fund members who are in the 65 to 66 age bracket are in a bit of a dilemma from now until the time when the passage of the legislation is clear. It is only those members who have a total superannuation balance of less than $1.5 million as at 30 June, 2019, or 2020 that should be concerned if they wished to maximise their non-concessional contributions by using the bring forward rule.  

The rules for non-concessional contributions allow up to two years standard non-concessional contribution to be brought forward if the total super balance as at 30 June in the previous financial year and up to one year standard non-concessional contribution  is between $1.4 and $1.5 million. Anyone with a total superannuation balance of greater than $1.5 million on those dates does not have access to the bring forward rule for the subsequent financial year.

As an example of the operation of the bring forward rule, a person who is currently 65 would have access to the bring forward rule of at least one year standard non-concessional contribution assuming their total super balance is less than $1.5 million. If they contribute greater than the standard non-concessional contribution, the bring forward rule will be triggered and they will be able to make the relevant contributions over a two or three year period. If they make the contributions prior to reaching age 67 the fund can continue to accept the contributions without requiring the member to meet the work test.

In contrast, a person who is currently 66 or 67 will not be able to trigger the bring forward rule as they were older than 65 on 1 July in the 2020/21 financial year. This will limit the maximum amount of non-concessional contribution they can make without penalty to $100,000 p.a., however, the consolation is that there is no requirement for them to meet the work test unless they wish to make contributions in the financial year after they reach 67.

Source: moneymanagement.com.au

Contributions level out after 2017 reforms

Contributions reverted to normal during the 2018 financial year, following an atypical jump in contributions in anticipation of the July 2017 superannuation reforms, the latest ATO SMSF figures have revealed.

According to the ATO statistical overview for the sector regarding the 2018 financial year, total contributions to SMSFs increased by 32 per cent to reach a high of $41.8 billion in 2016/17, with total SMSF benefit payments increasing by 31 per cent to $46 billion in the same year.

During the 2018 financial year, however, total contributions dropped to $17.4 billion and total benefit payments decreased to $37.7 billion.

In its analysis of the figures, the SMSF Association noted: “[The 2016/17 figures] were significant increases over the previous financial years, most of which can be attributed to a behavioral change resulting from the introduction of the superannuation reforms taking effect on 1 July 2017.

“With the release of the 2017/18 statistics, we now have a reversion to the norm.”

The association pointed out member contributions declined the most during the 2018 financial year, falling to $11.6 billion after peaking at $33.9 billion in 2016/17.

“This is likely due to the fact many SMSFs would have used their three-yearly contribution bring-forward rule in the previous financial year,” it noted.

As part of its analysis, the industry body also highlighted a sharp increase in lump sum withdrawals from SMSFs during 2017/18, which it attributed to the introduction of the transfer balance cap (TBC).

“As SMSFs moved money into accumulation phase and the TBC took effect, they took the opportunity to withdraw funds as a lump sum to keep a larger amount in retirement phase,” it said.

“If lump sums were taken from the retirement phase, this would create debits to their TBC.”

The ATO’s report also revealed the growth in the number of SMSFs reporting limited recourse borrowing arrangements had steadied and is increasing at a manageable rate.

In addition, the ATO found the level of SMSF wind-ups hit a record high during the 2018 financial year, while new establishments fell away.

Source: SMS Magazine