This year, the Tax Office will be turning its attention to the following emerging risks within the self-managed superannuation fund (SMSF) sector. Ensure you do not partake in any of the practices below or risk being caught in the Tax Office’s net.
Dividend washing is a share trading strategy that enables a taxpayer to access double the franking credits attached to fully franked dividends even though the taxpayer effectively holds only one parcel of shares. The shares are purchased in a special market that allows the taxpayer, often an SMSF, to re-acquire shares with a dividend attached, after the ex-dividend date, allowing them to take advantage of the additional franking credits to offset their tax liability or receive a refund of the excess imputation credits.
In the 2013-14 Budget, the government announced that tax legislation would be amended to close this loophole. In March, the Tax Office sent self-amendment letters to around 2,000 SMSFs identified as potentially having implemented a dividend washing arrangement. Of the identified SMSFs, 38% were in pension phase.
The Tax Office has noticed a retirement planning arrangement that involves a private company with retained earnings distributed by way of a franked distribution to an SMSF in circumstances where the SMSF is entitled to a refund in relation to the franking credits attached to the distribution.
This means ultimately earnings of the company are tax-free in circumstances where the SMSF holds the shares for a short period of time at no risk to realise the cash and franking credits in the most tax effective manner within an income year.
The Tax Office is keeping its eye on promoters who advertise questionable SMSF conferences in overseas destinations. The promotions target SMSF trustees citing they can claim a deduction for the full cost of the travel, accommodation and meals incurred when attending these seminars or workshops. The conferences appear to contain minimal training related to SMSF activities, and trustees contemplating attending such events have been warned of the potential to contravene the sole purpose test.
Home loan unit trusts
The Tax Office has identified a potential home loan unit trust arrangement which involves the purchase of a residential property by a non-geared trust whereby units are purchased by the SMSF, related family trust and SMSF members. The purchase of the asset is effectively financed by the SMSF and the property is occupied and rented by the member. The rental income less expenses is paid out to unit holders but the proportion of distributions is not consistent year by year.
Again, trustees should be aware of the potential to contravene the sole purpose test and/or of providing financial assistance to a member. If there is a form of “gearing” or investments in other entities involved within the trust, then the SMSF may also be in breach of the in-house asset provisions.
Illegal early release
The Tax Office continues to risk assess all newly registered SMSFs and take action to prevent suspect funds from entering the system. Where SMSFs the Tax Office has reviewed fail to lodge their first return by the due date, it will review them again to determine why they have not lodged.
Traditional illegal early release schemes and sophisticated schemes – such as round robin loans to purported unrelated entities – are under scrutiny. If the Tax Office finds that super savings are being illegally accessed, it will investigate the SMSF in question and remove it from Super Fund Lookup. If it finds illegal early release has occurred, it will take further compliance action and impose penalties.
In 2012-13, the Tax Office prevented 191 SMSFs from entering the system and removed 438 suspect funds from Super Fund Lookup.
The pressure is on trustees of SMSFs with two or more lodgement obligations overdue, who will have their regulation details removed from the Super Fund Lookup until their lodgements are brought up-to-date, or in the case of non-operating funds, wound up.
Affected funds will not be able to receive rollovers or establish new contribution arrangements until they address their lodgement obligations.
The Tax Office will be reminding APRA superannuation funds and employers to check the regulation details of SMSFs on Super Fund Lookup before progressing rollovers or contributions. SMSF trustees affected by this strategy will be notified in writing by the end of September.
This year, the Tax Office is also focusing on SMSFs that have never lodged (it will also, in serious cases, remove their details from Super Fund Lookup) and will consider using its new administrative penalties to fine trustees directly for not preparing accounts.
Exempt current pension income
The Tax Office will continue to monitor the compliance of SMSFs paying pensions to ensure they are claiming the correct amount of exempt current pension income. The key issues that can affect a fund’s claim to exempt current pension income include missing the minimum pension payment, segregation of pension assets and apportionment of expenses.
As part of its ongoing SMSF compliance program, the Tax Office risk assesses funds and then decides on appropriate follow up. It will analyse multiple indicators of non-compliance – including regulatory and income tax matters, drawing information from the SMSF annual return, auditor contravention reports and other sources including trustee and member records.
It will then determine a fund’s overall level of risk – low, medium or high – from both a regulatory and income tax perspective and take appropriate action to treat non-compliance. Consult this office for tips on how you can best adhere to your SMSF trustee obligations.