ATO set to add new items to SMSF watch list

The ATO will soon be updating its Super Scheme Smart project, which is effectively a watch list of arrangements that are designed for the purpose of avoiding tax.

Many of the arrangements pinpointed for regulatory focus have been in the ATO’s gaze for several months, but adding them to this list signals a considered focus, and fires warning shots to professionals in particular who are found to be promoting suspect structures.

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The ATO will now be upping its focus on contrived arrangements involving SMSF investment in property development ventures, because of their potential to trigger – among other things – the NALI provisions and compromise the sole purpose test.

“There is no general prohibition on SMSFs investing in property development arrangements. But given the regulatory rules, particularly where they involve related parties, it is very hard for an SMSF to maintain compliance with the regulatory rules when they do invest in those ventures,” said ATO deputy commissioner Kasey Macfarlane at the Chartered Accountants Australia and New Zealand SMSF conference in Sydney today.

“Not only does it raise issues around related party transactions and the arm’s length rules, often the arrangements we see are closely connected to one or more of the members’ current business activities, so it brings into question the sole purpose test. We have also had a small number of arrangements where the SMSF has been subject to the NALI rules, and there have been considerations of Part IVA,” she said.

Also, on the contentious issue of setting up a second SMSF, Ms Macfarlane said while the setup itself is not problematic, it can be where it’s a pre-cursor to behaviours that could manipulate tax outcomes.

“As soon you start playing around trying to manipulate the different funds between retirement and accumulation, then we are going to have a look and ask people to explain what’s going on there,” Ms Macfarlane said.

Industry lawyer Peter Bobbin argues the ATO’s position with this issue to an extent, which you can read more about here.

The tax office will also be paying attention to arrangements where individuals deliberately exceed the non-concessional contributions cap, presumably in order to manipulate the taxable and non-taxable components of their superannuation interest on refund of the excess.

“I’m not sure why you would go to that extent of deliberately exceeding the cap, going through the admin process of getting the refund of the excess back, other than to deliberately manipulate tax outcomes,” Ms Macfarlane said.

With the exception of where there are legacy issues, reserves are also firmly on the ATO’s regulatory radar, particularly where it seems they are being used to circumvent the new caps.

“The ATO considers that there are very limited circumstances where it is appropriate for a reserve to be established and maintained. We will be looking very closely and monitoring reserves for SMSFs, particularly if we see the creation of new reserves or a substantial increase in existing reserves,” Ms Macfarlane said.

“That would attract our attention because there is the potential that the reserves are being used as part of a strategy to circumvent the operation of some of the newer measure. Because if you’ve got money in reserves, then theoretically it doesn’t belong to anyone, and doesn’t affect the super balance or transfer balance cap.”

Further guidance is set for release on reserves shortly, which you can read more about here.