Every year the Australian Tax Office (ATO) puts out a compliance ‘hit list’ for SMSFs. Knowing which issues the ATO will focus on is a great way to be pro-active and keep your super fund off the ATO’s radar.
The hit list for the 2011-12 financial year has a very common theme – tax collection. With the audit season kicking into high gear as the deadlines for submitting your SMSF annual returns loom in February and May (read, Administering your super fund), here are some of the things that could attract attention:
The Top 100 richest SMSFs
If your SMSF is rich, be prepared for greater scrutiny. If you have a wealthy SMSF, the ATO will be watching closely to make sure your fund is paying enough tax.
New trustees are more likely to make mistakes and the ATO will have eagle eyes on you. Here’s some hints for new trustees:
- Make sure you’ve signed an ATO Trustee declaration within 21 days of starting your SMSF.
- The fund doesn’t exist until it has assets, so open a bank account in the super fund’s name and make an initial contribution.
- Document a written investment strategy for the fund, and review it regularly.
- Always have enough cash in the super fund’s bank account to cover expected payments and cheques drawn because overdrafts are a big no-no.
- If in doubt, get advice before you act.
- Never get involved in any Illegal early-release schemes; they’re not worth it.
Excess contributions tax (ECT)
The statistics on the number of people caught out by exceeding their contribution limits and being hit by huge tax bills are truly shocking. The ATO expects to issue over 70,000 assessments for excess contributions tax in 2011-12.
You can expect the ATO to come looking closely if you:
- Re-report contributions after receiving an ECT assessment.
- Have your SMSF pay your ECT liability without completing and signing an ECT release authority.
The best tip is to make sure you get your contribution reporting right the first time. And if you go over your cap, seek professional advice immediately because the extra tax can climb into six figures very easily.
Non-arm’s length income
If your SMSF receives non-arm’s length income, it must be declared separately in your tax return because it attracts tax at 46.5%. The ATO is on the lookout for undeclared ‘special income’. My tips are:
- Do not distribute any income from a discretionary trust to your SMSF.
- If you rent commercial property to your business, get a rental valuation and pay a fair rate of rent, preferably monthly in advance.
- If your SMSF is lending money, research the interest rate.
- Make sure private company dividends are reasonable.
Exempt current pension income
When your SMSF is paying a pension, the income of the fund will either be partly or wholly tax-free. The ATO is actively reviewing claims for exempt pension income and will deny the claim if you don’t get it right.
- Get an actuarial certificate unless your fund has properly segregated pension assets.
- Invest in regular asset valuations.
- Physically pay your minimum pension payment in cash before 30 June.
- Don’t exceed your 10% maximum pension limit if you’re on a transition to retirement pension.
- Make sure documentation is in place to start your pension at the optimal time.
Losses incurred by an SMSF
The rules have recently changed to prevent SMSFs treating shares as trading stock and deducting losses on their shares against income other than capital gains. If this affects you, double check your tax return and utilise transitional rules for trading stock held before 10 May 2011, if possible.
Make sure you have your audit done and tax return lodged by the due date. Laziness is a great way to attract attention!
SMSF auditors are under the ATO’s spotlight, but how does this affect you? If your auditor is not doing the right thing and attracts the ATO’s attention, that can draw attention to your SMSF too.
What can you do?
- Pay attention to who audits your SMSF.
- Make sure your auditor is independent and an SMSF audit specialist.
- Work with your auditor to make sure they have enough information to come to the right audit opinion. The more information you can provide your auditor the better.
Jo Heighway is the founder and CEO of Engage Super Audits.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.