In a recent article, Heffron managing director Meg Heffron said SMSF annual returns are a vital source of information for the ATO in assessing whether a fund is following the rules or not.
This means that when a fund doesn’t get their audit completed or submit their return, the ATO is flying blind.
“The fund might be doing all the other things right but the regulator has nothing to suggest that’s the case,” Ms Heffron explained.
“Not surprisingly, they have to assume the worst. Late lodgement is therefore a little like the canary in the coalmine – it tells the ATO there’s potentially a problem.”
Ms Heffron said in her experience, typically the first thing trustees of an SMSF do when they’ve done something wrong is stop lodging returns.
“While that might feel like the best thing to do (the SMSF equivalent of hiding under the doona), it generally backfires. Not surprisingly, a regulator that has to chase a trustee to fulfil their lodgement obligations is pretty cranky by the time they get it,” she cautioned.
The ATO she said has a number of tools in its armoury to turn the screws on late lodging trustees.
“Of course, penalties can be imposed – but that will come last when the return is eventually lodged. But in the meantime, the ATO can (and does) remove the fund from an important register known as “Super Fund Lookup” as soon as their return is late. Funds that are removed from that register can’t receive rollovers from other funds and employers often won’t pay contributions to funds in this position either,” she noted.
“Both behaviours make complete sense – funds and employers have to make sure the fund they are moving money to under these circumstances are ‘complying superannuation funds’. The only way they know if that’s the case is if the fund is listed as “registered” or “complying” on the Super Fund Lookup register.”
Ms Heffron also pointed out that funds lodge late in one year have a much shorter deadline the next year.
“For example, SMSFs with tax agents can usually lodge their 2021/22 annual return any time up to 15 May 2023. But any fund that lodged their 2020/21 late without being given an extension has a much earlier deadline for their 2021/22 return – 31 October 2022,” she said.
Auditors also have ways to deal with trustees who won’t give them the information they need.
“For example, SMSF auditors who find a compliance breach (or even just suspect that one might have occurred) have a legal obligation to tell the ATO even if they don’t end up completing the audit,” he said.
“It means that a fund can’t switch auditors just because the first one has found a problem. In fact, changing auditors at that point is very much something that would make an auditor suspicious and feel they had to report their concerns to the regulator. It’s also illegal for a trustee to take too long to respond to an auditor’s request for information.”
Given that the annual return is the ATO’s window into what’s happening in all these SMSFs, Ms Heffron said it’s not surprising that the first return for a brand new fund is even more important.
“The general view at the ATO (and I’d agree with this) is that people generally start off as they mean to go on. Trustees that do the wrong thing (for example, take money out of their SMSF when they shouldn’t) often do it in the very first year,” she stated.
“Not surprisingly, first year funds have an earlier deadline. For example any fund established in 2021/22 must lodge their first return by 28 February 2023 rather than 15 May 2023.”
Ms Heffron warned that new funds will also face much more scrutiny from the ATO if they are late with their returns.
“All in all, while deadlines are always important, some are more important than others. This extra context explains why this particular deadline – the SMSF annual return – is even more important than a normal tax return.”
