SMSF Illegal early access – beware the consequences

Welcome to our first newsletter, we hope you find it informative as well as our <FREE ADVICE website> dedicated to SMSF’s:  

• Taxation statistics 2009-10 now available
• Independent Audit Reports and Auditors of SMSF’s
• Proportioning Rule
• Bank accounts and winding up a SMSF
• Illegal early access – beware the consequences
• smsf-notice-of-non-compliance-set-aside

Taxation statistics 2009-10 now available

In April 2012 the ATO released the most recent edition of its most comprehensive statistical publication, Taxation statistics 2009-10. The 2009-10 income year’s statistics included:

• 377,693 funds lodged returns, a 4.8% increase from 2008-09
• funds reported total income of $112.1 billion, a 2.4% decrease from 2008-09
• total fund eductions were $35.5 billion, a 19.3% decrease from 2008-09
• funds were liable for $7.2 billion in net tax, a 26.7% increase from 2008-09.

By 30 June 2011, there were:

• 460,545 super funds
• approximately 1.4 million registered employers
• $1.34 trillion in total assets held by super funds.

For more information, on SMSF growth, Investments, members income, member balances, rollovers please refer to our website on <ATO statistics>.  

Independent Audit Reports and Auditors of SMSF’s

Expect the updated independent audit report for reporting periods on or after 1 July 2011. The new audit report is available on our <AuditOf SMSF.com.au/Auditor Checklist webpage>.   The proposed Stronger Super reforms, has been adopted, and has changed the eligibility requirements to be an approved auditor.  The ATO have released a label in the income tax return to provide an Approved SMSF auditor number (SAN). Registrations for Auditors is not available until 13 January 2013 and must be in place by 30 June 2013, therefore the label or field is not required to be completed until after 30 June 2013 but van be completed if the auditor has the number at the time of lodgement of the income tax return.  For more on the registration process see <who should audit a SMSF>

Proportioning Rule

SMSFs are not using the proportioning rule correctly. Trustees of SMSFs should note that it is important to work out the tax-free and taxable components of a super benefit when it is paid. The proportioning rule is used to work out these components.  The proportioning rule was introduced on 1 July 2007, and ensures that a benefit to a member is comprised of a taxable and tax-free component, which is in proportion to the taxable and tax-free components in their super interest.  To apply the proportioning rule, trustees should follow these steps:

• Work out the taxable and tax-free proportions of the current super interest in the fund.
• Apply these proportions to the benefit which is being paid.

For an Example see the <Proportioning Rule Example>.

Bank Accounts and winding up an SMSF

The ATO publication “Winding up a self-managed super fund”, states that a bank account must be kept open until confirmation of a fund’s wind up is received. The ATO will be updating this booklet to remove this requirement. Bank accounts can be shut once all expected final liabilities have been settled. In the case of tax liabilities, including the final SMSF levy, the liability can be prepaid or paid with lodgment.   However a bank account must be maintained when the SMSF is going to receive a tax refund. This happens only in a small percentage of cases after a final return has been lodged. In the case of an expected tax refund the SMSF bank account should be left open and after receipt of the money in the account the amount should be rolled over to the successor complying regulated super fund.   Some financial institutions have allowed the former trustee to endorse the cheque to themselves if they can prove that the fund has been wound up. The practice of paying the money to an individual must not occur as the refund is a protected retirement asset and this money must stay within the super system until a condition of release has been met.   The ATO doesn’t need an additional SMSF annual return to cover the rollover of this last transaction caused by a refund. As there would be no tax consequence for the SMSF and since lodging another final return would create some practical issues, such as having to pay another levy, another lodgment is not needed. However, a rollover form would still have to be completed and supplied to the successor complying regulated super fund.  

Early access of your super is illegal – beware of the consequences

The Commissioner is cracking down on illegal early release schemes for SMSFs with several recent successes at court. Do not be tempted to set up a SMSF with the intent to access your super savings early. If you do, you are breaking the law and will be liable to significant penalties.   There have been several recent cases where the severe penalties prescribed in the Superannuation Industry (Supervision) Act 1993 have been applied to those involved in illegal early release schemes. Not only are there significant tax implications for those concerned, large penalties – fines of up to $220,000 and jail terms of up to five years – could be imposed if you set up an SMSF and knowingly access your super illegally. One recent case saw three trustees of a super fund receive custodial sentences along with hefty fines for promoting schemes that encouraged individuals to illegally access their super early.

SMSF notice of non-compliance set aside

The AAT has set aside a non-compliance notice issued to a self managed superannuation fund (SMSF) for regulatory breaches involving loans to a related company. The applicants were the husband and wife trustees of an SMSF.

Between 2004 and 2007, the SMSF trustees loaned $307,000 to a property development company of which the trustees were directors. During an audit, the Commissioner identified a breach of the in-house asset provisions in the Superannuation Industry (Supervision) Act 1993 (SIS Act) in respect of the loans. The trustees provided an undertaking to the Commissioner that they would repay the loans from the company back to the SMSF by 30 September 2009. The loans were not repaid by this date and the Commissioner issued a notice of non-compliance under s 40 of the SIS Act, making the fund non-complying and resulting in a $145,619 tax liability.

The AAT set aside the Commissioner’s notice of non-compliance after finding that the exercise of his discretion under s 42A(5)(b) of the SIS Act (to give a notice of compliance even though there have been compliance breaches) would not be inconsistent with the objects of the SIS Act, despite the contraventions. While the AAT found that the contraventions were “serious”, it said they were not “wilful” and the impact on the fund had not been significant as the loans were eventually repaid (albeit late).

The AAT also noted that the tax consequences would be significant. The AAT said the case was “finely balanced” but held that it would be “disproportionately harsh” not to exercise the discretion under s 42A(5)(b) in favour of the trustees of the SMSF. When all of the circumstances were considered, the AAT said the trustees’ most significant breach was their failure to rectify the contraventions in a timely manner.

Re Pabian Park Pty Ltd Superannuation Benefits Fund and FCT [2012] AATA 375,
www.austlii.edu.au/au/cases/cth/AATA/2012/375.html