ATO warns self-managed superannuation funds on compliance

The ATO will take a bigger stick to the thousands of super funds abusing the ‘privilege’ of running things themselves.

The ATO says noncompliance on reporting is highly correlated with the illegal withdrawal of funds.

The tax office has warned the nation’s 600,000 self-managed super funds to comply with the law or face stiff penalties, revealing $20.5bn in assets in almost one sixth of SMSFs were officially “at risk”.

Assistant Commissioner Dana Fleming said the ATO had “great concerns” about 24,000 SMSFs worth $1bn which had never lodged a return. “This is highly correlated with illegal early use of funds,” she said in a speech at a superannuation conference on the Gold Coast.

“If you roll over money from an APRA super fund [to an SMSF] with the objective of taking money out, it’s highly unlikely you’ll lodge a first return to tell us you’ve done that,” she added.

SMSFs, managed by 1.13 million typically “mum and dad” trustees, have become the largest component of the nation’s $3 trillion in superannuation savings, with $750bn in assets, up 10-fold in 20 years.

“If you want the privilege or running your own super fund we want assurances you can do it,” Ms Fleming, who oversees the ATO’s SMSF oversight division, said.

A further 63,000 SMSFs worth $19.5bn, she revealed, had ceased lodging required documents to the ATO, putting the total number of SMSFs classified by the ATO as having their “retirement at risk” at around 87,000.

“I am really concerned about that. It means we have no visibility about where their retirement savings are,” she said.

Industry and retail funds managed funds, the second and third biggest components, managed $747bn and $529bn, respectively, as of late last year.

The royal commission into financial services, which had sharply criticised fellow regulators APRA and ASIC, had prompted the ATO get tougher on recalcitrant funds, Ms Fleming said, including writing to auditors and tax agents and rewriting internal guidance to ensure a tougher approach by staff.

“We have recalibrated so that a breach of law will now attract a penalty. This means there will be consequence from breaking the law, which will encourage better compliance,” she said. Previously, around three quarters of SMSFs that had been fined hadn’t ended up paying those penalties.

The value of fines levied on SMSFs was on track to double this year: $3.3m for the last six months of 2019 compared to $3.1 for the 12 months to June 2019, and $1.7m for the 2018 financial year.

“After we had taken enforcement action a significant proportion of these SMSFs were still significantly below that of the SMSF population in terms of compliance,” she said.

The number of SMSFs which had breached regulations had leapt 26 per cent to 10,330 – about 2 per cent of SMSFs that were lodging returns – over the 2019 financial year.

“We’re a little disappointed to see the share that are self-rectifying, about 50 per cent, has declined this year,” she added.

A series of reports from ASIC and the Productivity Commission in recent years have raised concerns about the rapid growth of SMSFs given the required compliance and the financial knowledge required to run them effectively.

The well attended speech at the annual conference of the SMSF Association also revealed the smallest of the 100 largest SMSFs, which pay no income tax in retirement phase, was $40m.

Ms Fleming said she was concerned only 35,000 trustees out of 1.13m had subscribed to the Australian Taxation Office’s SMSF newsletter, which contained crucial legal and regulatory updates. She urged the audience to call the ATO’s “whistleblowers hotline” if they suspected SMSFs or SMSF promoter engaged in illegal activity.

“The royal commission has prompted a fresh look on how we can be more effective regulator,” Ms Fleming said.

Adam Creighton attended the SMSF Association conference courtesy of the organisers.