Taxman turns up heat on super funds

Some of the largest super funds could be forced to pay more tax after an unprecedented ATO audit.

The Australian Taxation Office began auditing the largest superannuation funds in February.

Several of the largest superannuation funds in Australia could be forced to pay more tax after an unprecedented ATO probe hands back reports over the next two weeks amid concerns that major wealth managers are unlawfully avoiding tax through complex ­financial products.

The Australian Taxation Office began auditing the largest superannuation funds in February as part of its assurance work that the largest 1000 public and multinational companies operating in Australia were not dodging their tax bills.

While two of the largest funds — the $160 billion Australian­Super and the $100bn QSuper — are usually included in the ATO’s top-100 company audit, many smaller super funds have never experienced such scrutiny, and lack the resources to comply with complex tax requirements.

KPMG tax specialist Damian Ryan told The Australian: “There are a large number of super funds sized in between $2 billion and $40bn that are now getting a lot of scrutiny on their tax risk management and governance.

“For those outside the top 20 funds, this is a level of scrutiny they’ve never had before,” Mr Ryan said. “The major super funds are considered low-risk taxpayers. They are quite conservative with their tax affairs. Typically, if there is an issue it is due to a limitation of data reporting.”

The probe could have concerning implications for smaller funds if any of the ATO’s streamlined tax assurance reports raises “red flags” about compliance.

Many smaller funds are seeking to merge with larger operators following new laws banning the use of fees collected from lost and forgotten savings accounts to subsidise other members.

Mr Ryan said funds that ­received a “red flag” would need to address any issues, and this could increase their compliance costs — ultimately borne by savers.

ATO commissioners James O’Halloran and Graham Whyte have raised concerns about inconsistencies in the way funds report contributions information to the ATO and the Australian Prudential Regulation Authority, which regulates the $2.7 trillion super sector.

The commissioners also singled out complex derivative products being marketed to a number of funds as a potential problem.

The ATO is worried that a specific financial product, known as a “total return swap”, is allowing super funds to minimise tax in breach of the ATO’s anti-avoidance rules.

A total return swap is where one investor trades an expected return on an investment — in this case income from share dividends — for a cash payment from ­another investor.

The anti-avoidance rules require that investors hold onto shares for longer than 45 days in order to claim franking credits. But the “total return swap” means funds may be claiming dividends despite not having any, or minimal, exposure to the shares.

The ATO is also targeting ­investments in limited partnerships and the characterisation of income from these investments.

Mr Ryan said smaller funds would run on a model where the administration of the company and custodianship of the investments were outsourced, while many would likely lack a specialist internal tax unit that would ­ensure compliance.

The super system is under­going radical transformation after the passage of government legislation consolidating lost and forgotten member accounts and clamping down on fee-gouging.

Meanwhile, clearer fee disclosure rules soon to be enacted by the corporate regulator, and tougher performance hurdles to be implemented by APRA, will push many of the 200 funds in the system to merge.

Super funds considering accepting a merger would be likely to ask for copies of their ATO ­assurance report before proceeding with a merger, Mr Ryan said.