ATO pinpoints Part IVA hotspots for the SMSF sector

Ms Fleming said SMSF professionals should work with their clients to ensure that they are making the right decisions, particularly in the post royal commission environment.

Reserves

Reserves is one of the areas that continues to be on the ATO’s radar, she said. While the total amount in reserves has fallen from around $400 million down to $275 million, which is in line with the ATO’s expectations, Ms Fleming said the average balance in each reserve has increased from $167,000 to $292,000.

Ms Fleming said it was likely that many of the 690 SMSF trustees who reported reserves for the first time in the last financial year were unaware they had to report the reserves previously.

While she warned that the ATO would be closely monitoring the creation of new reserves, she reassured SMSF trustees that hadn’t reported reserves previously because they were unaware of the need to report that the ATO would not be taking compliance action in this area.

Ms Fleming said the ATO is undertaking a baseline monitoring exercise in this area which will be comparing data from before the implementation of the reforms and comparing it with the level of reserves now.

“We will be looking for any emerging patterns and what has changed over time,” she said.

She also reminded SMSF practitioners to ensure that their client’s trust deed actually allows for the use of reserves.

“Where SMSFs do implement strategies, which seek to circumvent the caps, we will seek to apply the sole purpose test or Part IVA,” she said.

Multiple SMSFs

Ms Fleming said while there may be perfectly genuine reasons as to why trustees might want to have a second SMSF, the ATO still has some concerns in this area.

The ATO, she said, also has a baseline program for these trustees.

“We have a good understanding of the population who hold multiple SMSFs. In one particular case, we found a trustee who hold eight different SMSFs,” she said.

“We will be monitoring the behaviours of this sub-group going forward in order to identify whether there’s any potential patterns of behaviour.”

Streaming arrangements

The ATO, she said, also continues to keep a close eye on any tax planning and streaming arrangements that take advantage of the concessionally tax environment.

Some of the arrangements the ATO is focused on in particular include dividend stripping arrangements, personal services income being diverted into the super fund environment and related party arrangements.

The ATO is also watching for schemes that involve granting a legal life interest over a commercial property.

“This is where rent from a commercial property of a life interest is diverted to an SMSF without the actual legal title of the property transferring to the SMSF,” she explained.

The ATO, she said, has demonstrated its commitment to addressing these kinds of behaviours.

“Actions that have been taken include funds losing their complying status and the disqualification of trustees which generally means the unwinding of the fund,” she said.

“We have taken cases to the general anti-avoidance rules panel and received affirmation that Part IVA in a number of these cases.”