Pension, deductions blunders feed multi-million dollar SMSF tax gap
The ATO has revealed the tax gap for superannuation funds, finding ECPI misunderstandings and over-claimed deductions are contributing to a $39.9 million hole created by small funds, including SMSFs.
The findings of the Small Super Funds Income Tax Gap report on the difference between total tax collected for small super funds, and the amount that would have been collected if all associated taxpayers were fully compliant with the law. The small super fund segment consists of 550,000 SMSFs and 2,200 small APRA funds.
For the 2014-15 income year, the ATO estimates a net income tax gap for small super funds to be $39.9 million. The tax payable from small super funds in that year was $1.2 billion, and the gap represents about 3.2 per cent of theoretical liability.
However, the ATO notes the precision of the tax gap estimate is limited by its “relatively small” sample side, giving wide confidence intervals. Further, the figures are likely to be updated in the coming years, as returns data is finalised.
The ATO reached its tax gap figure for small funds through a random enquiry program, which also showed that misunderstandings about the application of ECPI, incorrect reporting of franking credits and over-claimed deductions were key aspects of non-compliance for SMSFs.
To address the gap, the ATO will continue its focus on monitoring the tax paid on contributions to small funds and monitor taxes paid on investment returns within SMSFs. The ATO will also monitor transfer of wealth from a non-superannuation environment into an SMSF, to detect profit shifting strategies.
Although the ATO is labelling the net tax gap for small super funds “relatively small,” in proportionate terms it is more than double what is owed by large super funds for the 2015-16 financial year.
For the 2015-16 financial year, the net large super fund income tax gap is estimated to be $127 million, translating to 1.5 per cent of theoretical tax liability. The total tax payable by large super funds for the 2015-16 income year was $8.2 billion.
SMSF Adviser notes there are limitations to drawing conclusive comparisons between the two segments, including that the ATO does not have published tax gap data for both small and large superannuation funds from the same income year.
Typically, large funds trip up on their compliance obligations where they’ve had “differences in law interpretation” compared to the ATO. This includes on the Foreign Income Tax Offset, CGT discounts and over-claiming of franking credits.
Still, the ATO said large super funds have relatively lower risk than other large corporates when it comes to tax compliance.
Ramping up its focus on third-party data, which is often produced by outsourced companies for large super funds, is central to the ATO’s plans for targeting non-compliance with tax obligations for large super funds.
“As outsourcing is a significant feature of the industry, the quality and integrity of third-party data is essential for accurate reporting by the funds. This can lead to third-party reporting errors and therefore unpaid tax,” the ATO said.
“We recognise the quality and integrity of third-party data is key to accurate reporting by funds, and are broadening our existing focus on fund governance to ensure appropriate checks and controls are in place to provide added levels of assurance around third-party data,” the ATO said.
The SG gap
The net superannuation gap, which is the difference between the value of SG gaps required to be paid by law minus what is actually paid — is about $2.85 billion. The ATO originally published these findings last year.
This made way for a crackdown on employers skipping their SG payments, particularly those engaging in phoenix activity.