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The keys to effective SMSF reporting criteria

strategy
By Shelley Banton
April 09 2018
4 minute read
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A recent review of the 2016 SMSF annual statistics released by the ATO indicates that some SMSF auditors are continuing to lodge ACRs unnecessarily.

The key to effective SMSF reporting criteria lies within how SMSF auditors interpret the twenty-two (22) sections and regulations of SIS they’re required to report to the ATO.

Statistics show there are nine (9) major contravention types which include multiple reportable sections and regulations, and at least eight (8) lumped into an “Other” category that represents only 3.7% of the total number of contraventions lodged.

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When these eight reportable sections and regulations account for less than 1% of the value of all reported breaches, SMSF auditors might need to rethink how they’re applying the reporting matrix under which they work.

The top 2 contraventions, loans to members and in-house assets, have remained the same for at least five years and accounted for 41% of all contraventions.

The ATO has identified that some of the loans to members contraventions (21.4%) includes hidden illegal early release breaches not identified correctly by SMSF auditors.

Anecdotal evidence further suggests that the level of in-house assets contraventions (19.1%) may also include hidden member loans incorrectly reported as an in-house asset.

For some unfathomable reason, some SMSF advisers don’t view in-house asset breaches as seriously as a loan to member breach and will argue the toss with their SMSF auditor.

Regardless, the ATO reviews the fundamental issues of each fund’s breach irrespective of the reporting classification.

Either way, an SMSF will be catapulted to the top of the ATO audit queue as both breaches are categorised as high-risk and receive the same treatment.

Separation of assets comes in next at a stable 12.8%.

With many of these breaches relate to fund assets not held in the correct title, it will be interesting to see whether this figure declines in future as verifying assets in a data-fed SMSF society is fast becoming a dying art.

Note that while data feeds are automatic, the bank account must be set up within the SMSF administration platform manually by entering information such as the full account name before activating the feed.

In this situation, the only way to check that a newly established bank account is in the correct holding name of the fund (e.g. a fund with a corporate trustee should be identifiable as ABC Pty Ltd ATF The ABC Super Fund), is to review a copy of bank statement.

Administrative type contraventions appear next and account for 10.3% of all reportable contraventions. While there’s no detail about what “administrative-type contraventions” comprise, they most likely include:

1. s103 - Trustee must keep and retain minutes of all meetings for at least ten years

2. s104A – Trustee declaration in the approved form must be signed within 21 days of becoming a trustee (or a director of a corporate trustee) of an SMSF

3. s35C(2) – Trustee must ensure that requested relevant documents are given to the auditor within 14 days of the request being made

When the hidden time and cost of dealing with SMSF documentation adds no direct value to the retirement outcomes of SMSF trustees, finding a commercial balance between ensuring a fund is compliant and drowning in paperwork becomes a challenge for SMSF auditors.

By way of example, s35C(2) has very little relevance to how SMSF auditors deal with their clients who are primarily SMSF administrators and accountants.

The commencement of the fourteen days under s35C(2) is questionable because the SMSF trustee is not the first point of contact, leaving the application and enforcement of this rule difficult and open-ended.

We need to ensure that SMSF trustees are reported to the ATO when they are unresponsive or act in a hostile and uncooperative manner, particularly when there are other high-risk reportable breaches present.

However, when an SMSF auditor strictly imposes the SIS rules and needlessly lodges an ACR simply because ‘14 days’ have passed since they issued a request for information, something’s got to give. Especially when there are no other contraventions to report.

There’s no doubt that any changes to SMSF reporting need to be both pragmatic and mindful of the legal requirements involved in operating a compliant SMSF.

Unfortunately, in the aftermath of Super Reform, ATO resources have been stretched to capacity and reviewing the reportable sections and regulations of SIS - along with the testing criteria and reporting framework - has had to make way for other priorities.

To ease the burden of SMSF red tape, SMSF auditors can start by dealing with clients in a commercial, but compliant manner with a focus on communication and understanding.

The remaining 25% of reportable breaches include borrowings, sole purpose test, investments at arms-length and acquisition of assets from related parties.

Of course, SMSF auditors aren’t infallible and can get it wrong. Recently, a fund was reportedly contravened on s109 (investments not being maintained at arms-length) as it did not meet the safe harbour guidelines in PCG 2016/5. While this arrangement may not have been at arm’s length, merely falling outside of the safe harbour guidelines is not a breach.

SMSF auditors are in a no-win situation: if they spend too much time looking under the hood of an SMSF, they're pedantic and unreasonable. If they miss something, the blame falls squarely on their shoulders.

It’s important that SMSF auditors ‘get it right’ by reviewing fund issues on their merit and aligning regulatory compliance with their professionalism and commercial reality.

The one-size-fits-all cookie cutter approach is dangerous as too many non-compliant funds will slip through the cracks, while a technocratic approach will alienate even the most helpful SMSF trustee.

Shelley Banton, Executive General Manager, Technical Services ASF Audits