ATO intentions to consider

It’s official. There are now over 1 million members in SMSFs with more than $558 billion in total assets held in over 500,000 funds. There are no signs of this growth slowing down either, with 30,000 new SMSF registrations again noted in 2013/14.

What is interesting is there are about 43 per cent of these funds in pension mode. According to the Australian Taxation Office (ATO), there has been a strong move away from taking lump sum benefits to the point where the tax office is now understood to be handing out more refunds than it is collecting tax.

The pressure is on pension tax exemption into the future and it’s important for the industry to rally around this key incentive to superannuation savings and retirement planning. However, there is pressure on other areas of the SMSF sector as well and it has been argued the ATO has been shaping its current views with a revenue-grabbing focus.

But all is not as it seems according to ATO officials attending recent Self-Managed Independent Superannuation Funds Association (SISFA) state chapter forums, in which the following topical issues were discussed.

Penalty hit list

There has been a lot of noise and bluster around the new penalty regime starting on 1 July. The ATO has indicated the penalties are not to be automatically activated by the auditor contravention report (ACR), although it is expected ACRs will feature prominently in its risk assessment profiling. The ATO is apparently more interested in the “serial non-lodgers” – the ones that don’t lodge their SMSF return when they are supposed to, if at all, in some cases. According to the tax office, around 2 per cent of SMSFs don’t lodge and around 20 per cent lodge late. Under the new penalty regime, this alone carries penalties from $850. The ATO is also interested in “loans to members” since this is still the primary source of contravention among SMSFs. The repeat loan offenders and areas of “unrectified abuse” are top of that list.

Low-interest related-party loans

A recent private binding ruling in which a low-interest related-party loan was considered under a limited recourse borrowing arrangement resulted in the non-arm’s-length income (NALI) provisions applying. This has attracted a lot of attention and is regarded by many as a shift away from earlier ATO views, which were purported to green light low or zero interest loans by related parties to SMSFs.

SISFA is strongly of the view the income derived by the SMSF in these cases is not automatically NALI. This is because the income of the SMSF is derived from another source, so provided the investment relationship is conducted on arm’s-length commercial terms, then there can be no NALI. The source of the loan money is irrelevant to the question and the legislation doesn’t require examining the net income position of the fund. However, the area remains a contentious one and further clarification is needed, either by way of guidance from the ATO or legislative change.

Excess contribution waivers

It is welcome news that the government is proposing to make further improvements to the excess contributions penalty regime from 1 July 2013. However, what is also pleasing is SISFA is also aware of a number of existing excess contributions cases in which the ATO has applied the de minimis principle in circumstances where the bring-forward rule for non-concessional contributions has been accidentally triggered before 1 July 2013, resulting in disproportionate penalties. This has led to reduced or even waived tax assessments in some cases.

Contribution reserves protocols

The ATO is also broadly accepting of certain contribution reserving strategies in which, depending on age, up to $70,000 of concessional contributions can be made in June and claimed as a tax deduction in the current income year, with up to half those contributions allocated in June and half allocated by 28 July of the following income tax year.

While the administrative process is to have all of the concessional contributions assessed in the current income year, which would trigger an excess contributions pre-assessment letter, the ATO is understood to accept that properly executed strategies achieve the double deduction effect without, in the end, triggering an excess contributions tax assessment. However, caution must be exercised in this area and the processes outlined in ATO Interpretative Decision 2012/6 and Tax Determination 2013/22 must be followed.

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