Avoiding a contravention avalanche
SMSF auditors can play an important role in the lead-up to 30 June this year by identifying any shortcomings or compliance issues with the development of new strategies for clients.
Over the last few months, we have seen continued calls from regulators to advisers and accountants to ensure they fully understand the new superannuation legislative requirements coming into effect on 1 July 2017.
But as we enter the busy season in the lead-up to the 30 June 2016 tax return lodgement period, it’s equally important that auditors are also across the changes and the impact they have on their regulatory obligations.
Under the s129 rules, auditors must advise SMSF trustees in writing if they become aware of any contravention of the SIS Act, certain sections of the Corporations Act or the Financial Sector (Collection of Data) Act 2001 that have occurred, may be occurring or may occur.
‘May occur’ is the key point to note here. Auditors have an obligation to assess whether the trustees’ situation could potentially lead to a contravention and, if so, advise them of this in writing. However, the auditor can only advise of the potential contravention. They cannot provide advice on how to rectify it. Developing a plan of action to address the potential contravention is up to the trustee, who may then choose to share this with the auditor and seek their opinion.
In providing feedback, auditors should be mindful of retaining their independence. They must be very clear in the definition of their role and ensure the expectations of their clients and strategy teams are appropriate. Where the auditor can potentially add value is in providing insights that help identify shortcomings or problems during the development of strategies – particularly in relation to compliance with the SIS Act and other related regulations – before they become irreversible and lead to a breach.
Key areas where questions may arise for auditors of SMSFs over the next few months include:
- Compliance with the rules in relation to related party borrowings that came into effect on 31 January 2017;
- Pension set-ups, particularly in respect to whether they result in an entitlement to an uplift in the capital gains tax cost base of assets; and
- Strategies to comply with the reforms coming into effect 1 July 2017.
Let’s take a closer look at some of the key reforms that will be of interest to auditors.
Member total super balance
Where a member’s total superannuation balance exceeds $1.6 million, a breach may occur if the member continues to pay for fund expenses out of their personal account. Even if the transaction can be classified as a borrowing undertaken by the SMSF, it’s likely to be in breach of the strict rules governing such arrangements, for example the acquisition of an asset.
In those circumstances, the auditor has no discretion and is obliged to lodge an auditor contravention report with the ATO. Any repeated or unrectified breaches also need to be reported, regardless of materiality.
CGT relief only applies to assets held prior to 9 November 2016 and the relief is not automatic. The SMSF must elect for it to apply and notify the ATO of the election before the SMSF’s 2016-17 annual return becomes due.
Unsegregated funds don’t need to take action before 30 June 2017 (the date their deemed sale occurs). For fully segregated funds, however, the deemed sale and re-acquisition dates can occur at any point from 9 November 2016 to 30 June 2017.
Many SMSFs are segregated by default (for example, funds that are 100 per cent pension mode), but if a contribution is made to these funds before year-end, it is considered unsegregated. Decisions around CGT relief are critical, and the cessation of the pension and the adjustments required should be well-documented.
30 June 2017 is the final opportunity to contribute $540,000 in brought forward non-concessional contributions. This is particularly important for members with an account balance in excess of $1.6 million, given the imposed restrictions after 1 July 2017. The key is to ensure members’ eagerness to make these non-concessional contributions does not result in a contravention of the current rules.
Re-contribution strategies and death benefits
Re-contribution strategies designed to help minimise the ‘death tax’ have been in place for a number of years. Under the new legislation, these strategies will be impacted by the value of the member’s transfer balance account, their total super balance, as well as the removal of the ability to elect that a lump sum payment be treated as being in satisfaction of the payment of a pension. Therefore, an assessment of these strategies prior to 1 July 2017 is recommended to help avoid contraventions.
Additionally, changes to death benefit rules from 1 July 2017 will have a knock-on effect for estate planning. A review of the member’s existing arrangements will be critical to ensuring the new changes do not have an adverse effect.
Auditors need to ensure both they and their clients are across the full impact of these legislative changes and understand which areas they need to address in order to meet them.
In the lead-up to 1 July 2017, the question that should be asked is, “If current strategies are not reviewed or a new strategy is put into place which leads to a contravention, what cost could that have on your brand or business?”
Matina Moffitt, financial services executive director, Ernst & Young Australia