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Will real-time reporting affect ECPI claims?

As SMSF advisers struggle to keep up with the myriad changes in the SMSF space, it’s the fallout from events-based reporting that may have the most impact.

While there’s been industry consultation about what it is and how it will work, the implications for how an SMSF will operate in the future has gone largely unnoticed.

What is real-time reporting?

Events-based reporting, also called real-time reporting, looks to improve and streamline how SMSFs report member information to the ATO. It will be a significant change to the current reporting system of simply completing an annual return after the end of the financial year.

The new regime has already commenced for Australian Prudential Regulation Authority funds and SMSFs will have to start reporting to the ATO from 1 July 2018.

Until then, a transitional reporting system is in place, which is still being developed by the ATO in conjunction with industry.

How will it work?

From 2018, SMSFs will have to report to the ATO when an income stream starts within 28 days after the end of the quarter it commenced. This will establish the value of a member’s transfer balance cap (TBC) at that time, which cannot exceed $1.6 million across all member pensions.

Any further transaction(s) that results in a debit or credit to that TBC will also have to be reported within 10 business days after it occurred.

Even though real-time reporting is on hold until 2018, SMSF advisers are urged to keep on top of a member’s TBC because they will be required to report on a ‘backfill’ of transactions that occurred during the 2017 financial year.

Potential impact on ECPI

The greatest impact of the new regime may be on a fund’s ability to claim exempt current pension income (ECPI). The next biggest issue will be getting used to the new system.

Reporting in real time, regardless of how good administration platforms feed the ATO’s bulk data exchange channel, means SMSF advisers will still be required to kick-start the pension manually. Even the best cognitive technology won’t be able to automate the start of a pension.

While the optimum time to do this is at the start of the financial year, there may be implications if the deadline is missed or it is not reported at all. It is unknown whether the ATO will disallow a fund’s ECPI claim on that basis.

In real terms, it will mean the ability to change the start date of a pension, the opening balance (for example, starting a new pension every time a contribution comes in or to make sure the pension actually paid fits within the minimum/maximum limits) or shifting pension/benefit payments between members is closed.

Pension commutations are also in the firing line. There are many reasons for commuting a pension, but those who continue to commute pensions after the end of the financial year may now be penalised.

Additionally, withdrawals and deposits in error can no longer be treated (as an afterthought) as contributions and pension payments.

Given the new requirements to report any debits or credits to a member’s TBC within a 10-business-day time frame, the ATO may refuse to accept the fund’s claim to ECPI when there is no real-time reporting of the commutation.

These issues won’t necessarily be picked up at audit either, because ECPI is a tax issue not a Superannuation Industry (Supervision) Act compliance issue. The worst-case scenario is the fund will be qualified on Part A of the audit report because the tax liability is incorrect.

For the very first time, SMSF advisers could find the untimely reporting of pensions combined with the ATO’s data-matching capabilities may affect their client’s ability to claim ECPI.

Impact on market valuation

The current market valuation of all assets, especially property, will also have an important impact on a member’s TBC and total superannuation balance.

It is anticipated valuations will be under intense scrutiny by the ATO, which will be closely monitoring them to ensure compliance with the new legislation.

SMSF auditors will be especially vigilant in reviewing valuations as it is anticipated there will be a risk that funds undervalue their assets to stay under the new caps and balances.

There may be additional problems in obtaining up-to-date valuations when the fund has overseas property or property in investment vehicles such as a private trust that have no statutory requirement to prepare their accounts on market value basis.

Depending on the documentation provided, the SMSF auditor will be required to use their professional judgment in ascertaining whether the evidence provided supports a current market valuation.

Conclusion

The new reporting regime will be here before we know it. Those most affected will be SMSF advisers as a result of increased administrative compliance burdens imposed by these super reforms.

Many still struggle to keep up with the new changes. With about 60 per cent of SMSF trustees at retirement age, the onus will be on SMSF advisers to ensure they stay on top of their client’s TBCs in the new events-based reporting regime.

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