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In a speech given earlier this month, ATO assistant commissioner Dana Fleming highlighted seven key mistakes SMSF trustees make when establishing their funds.

Despite the continued growth in SMSF membership, key mistakes are still being made when it comes to the set-up of funds, the ATO has revealed.

Ms Fleming said that common errors include inaccurate registration; failing to meet sole-purpose testing; prohibited loans; lending, leasing or investing more than 5 per cent of in-house assets; separating assets; borrowing money and administration issues.

In her speech, Ms. Fleming said the two most common mistakes made during the registration phase are: failure to properly establish the SMSF trust before applying for an ABN and the omission of member, trustee or director details.

Another area where trustees are experiencing problems is around sole-purpose testing. Ms. Fleming emphasized that any investment that issues current-day benefits to members or parties related to the fund violates the sole-purpose test.

SMSF trustees have also been found to breach rules barring the loaning of fund monies or assets to members of the SMSF or their relatives, while others lent, invested or leased more than the allowed 5 per cent of the fund’s total assets to related parties of the SMSF. In fact, some failed to ensure bank accounts and other such assets where actually held in the fund’s name.

Trustees were also discovered to have borrowed money, despite this being prohibited, and a number struggled in administrative areas. This included mistakes in drafting and updating the trust deed, an inability to maintain the investment strategy or meet lodgement obligations, not possessing a valid bank account or electronic service address, and failing to manage the annual audit process.

Such mistakes reflect relevant findings, with ASIC’s report 576 Member Experiences with Self-Managed Superannuation Funds, released in June this year, uncovering many members lack a basic understanding of their SMSF and their legal requirements as trustees.

Despite most respondents opting to set up SMSF accounts in order to gain control of their investments and superannuation, many admitted to relying on “financial experts” to file their paperwork, offer advice on investments and control the day-to-day running of their SMSFs.

This is particularly perplexing, as it was also found that some surveyed members did not check the credentials of their trusted “financial experts” and relied heavily on “gut feel” or the personal recommendation of a family member, friend or colleague when choosing financial advice.

In spite of such lack of understanding, there were more than 1.1 million SMSF members by March 2018, accounting for 595,840 accounts. This is up from 1.07 million members as of June 2016.

In light of this, the ATO has again asserted the importance of ensuring the fund is set up correctly. This is necessary to ensure the trustee is eligible for tax concessions, can receive contributions and can easily manage the fund’s operations.

If you’re thinking of setting up your own self-managed super fund (SMSF), to take charge of your retirement and be able to make investment decisions, there are some important steps you have to take before you seek registration with the ATO such as choosing between individual trustees or a corporate trustee, creating the trust and trust deed appointing trustees or directors, setting up a bank account, obtaining an electronic service address, and preparing a windup strategy.

Itis a complex process with the ATO as the gatekeeper ensuring that only genuine trustees are allowed into the SMSF sector. This is achieved by conducting pre-registration checks on newly registered SMSFs and new members added to existing SMSFs, as well as maintaining the Super Fund Lookup (SFLU) which is a public register of super funds that third-party funds and employers can use to determine if they can pay rollovers or contributions to an SMSF.

The ATO uses analytical risk models that look at a number of factors and data related to new SMSFs or new members to determine the risk of illegal early release of funds or non-compliance.

This consists of the trustees’ financial history and behaviour including: bankruptcy; debts owed to the ATO; outstanding lodgements; poor lodgement or payment compliance history; ability to maintain an ongoing super fund; and whether the individual has been linked to any other SMSFs of concern.

When a risk is identified during the pre-compliance check, the ATO will usually undertake further checks and interviews with the trustees involved to ensure that they are genuine in wanting to establish an SMSF and understand all the obligations and consequences of failing to comply with super laws, as well as having received adequate professional advice or have had appropriate education.

Where there are still concerns with the registration of the SMSF even after speaking to the trustees, the ATO will withhold registration and trustees will need to seek a review of the decision and address any concerns raised during the new registration check. In the 2017-18 income year, there were around 26,000 SMSF registrations and approximately 2,100 were subject to further review. Of those reviewed, 29% had their ABN cancelled and a further 16% had their registration details withheld from SFLU.

Therefore, it is important that the SMSF be set up correctly for the sole purpose of providing retirement benefits for its members. Even at the set-up stage, it is important to look ahead for life events such as marriage, divorce, or death which may impact on an SMSF. While some of these issues may be unpleasant and a conversation involving them unwelcome, it is important to note that an SMSF is a long-term retirement vehicle and it is prudent to ensure from the beginning that there is a strategy to deal with unexpected events and wind up the SMSF if necessary.

Need professional help?

We can advise you on various aspects of setting up an SMSF. We can cast our experienced accounting and taxation eye over your current fund.

With the 31 October fast approaching, so is the deadline for lodging your tax returns. If you’re making the last-minute scramble to gather all your tax documentation, keep in mind there are some changes in this year’s tax return particularly in relation to rental properties and superannuation.

If you own rental property, you should be aware that you are no longer able to claim a deduction for depreciation of second-hand assets in relation to the property in this year’s tax return. The denial of deduction applies to second hand assets acquired at or after 7.30pm on 9 May 2017 (unless it was acquired under a contract entered into before this time), and second-hand assets acquired before 1 July 2017 but not used to earn income in the 2016-17 income year. In addition, travel expenses related to residential investment properties are no longer deductible.

In relation to superannuation, from 1 July 2017, the spouse income threshold for the tax offset has increased, meaning that more people will be able to claim the offset in this year’s tax return. You may be able to claim an offset of $540 if you made a contribution to your spouse’s super fund in the income year and your spouse’s income is less than $37,000. If your spouse’s income is between $37,000 and $40,000, a part offset may be available.

In addition to the changes in the tax return, the ATO has also outlined 5 of the most common mistakes that they have seen, which are:

• leaving out income from temp jobs or money earned from sharing economy;
• claiming deductions for personal expenses, such as home to work travel, normal clothes, or personal phone calls;
• no records or receipts kept of expenses;
• claiming for something that wasn’t paid for or was reimbursed;
• claiming personal expenses for rental properties including deductions for the private use of property or interest on loans used to buy personal assets.

Assistant Commissioner Kath Anderson said: “[t]his time we will be paying close attention to claims for private expenses like home to work travel, plain clothes, and private phone calls. We will also be paying attention to people who are claiming standard deductions for expenses they never paid for.”

According to the ATO, around half of the adjustments they make to tax returns are due to the taxpayer having no records or poor-quality records. For those taxpayers who are putting in claims, especially work claims without any evidence, the ATO says it will be checking all the data, either by data-matching against other taxpayers in similar industries to find discrepancies or by contacting the taxpayer’s employer when a “red flag” is raised.

Need help with your return?

If you’re just getting started on your return now and need some help maximising the deduction you’re entitled to or untangling complex tax affairs, we can help. If you don’t think you will make the 31 October deadline, you may be able to get a concessional lodgement date if you lodge your return with us. Alternatively, we can help you apply for a deferral and give you more time to sort out your affairs.

It’s been a little over a year since the dual changes of the pension transfer balance cap and the reduction of tax concessions for transition to retirement pensions were implemented by the government. Recent research has indicated that these changes has achieved their policy outcome by making almost 25% of previously tax-free SMSF assets lose their status and become taxable.

To recap, a pension transfer balance cap of $1.6m applied from 1 July 2017 to limit the total amount of accumulated superannuation that can be transferred to the retirement phase, where the earnings on assets are tax-exempt. The transfer balance cap is indexed but adjustments are unlikely to occur until at least 2023-24.

The ATO uses the concept of a transfer balance account to track each person’s net pension amounts against their transfer balance cap. Where an individual’s transfer balance accounts exceed their transfer balance cap, the ATO will issue a determination requiring the excess amount to be removed from retirement phase.

In addition, these excess transfer balance amounts are subject to tax, initially at 15% but increasing to 30% for breaches in subsequent years.

Similarly, the tax exemption on earnings for pension assets supporting Transition to Retirement Income Streams (TRISs), also known as transition to retirement pensions (TTRs) was removed from 1 July 2017. From that date, earnings from assets supporting TRISs were taxed at 15% instead of 0%. TRISs have traditionally been used by individuals who have reached their preservation age but do not want to retire.

According to recent research, at June 2018, one year after the sweeping superannuation changes came in, SMSF asset value in accumulation phase was approximately $422bn. This was a 90% increase from March 2017 (before the changes) when asset value in accumulation was around $222bn.

Based on simple modelling (not taking into account contributions tax, deductible expenses, and rebates), assuming a modest return of 5% on assets for the 2018 income year, this increase of SMSF asset value in accumulation phase would result in $3.2bn worth of tax on SMSF earnings. This equates to a $1.5bn increase from the 2017 year.

However, it’s not all doom and gloom for the SMSF sector after the changes, one ray of sunshine in the research is that the changes have led to new strategies being implemented which significantly improved gender imbalance in SMSF assets and balances. Two of the most notable strategies used include:

• contributions splitting which involve a member of an accumulation fund splitting superannuation contributions with his or her spouse to equalise their total superannuation balances to counter the $1.6m transfer balance cap.
• re-contributions strategy which involve withdrawal and re-contributions to a spouse’s superannuation account to equalise total superannuation balances up to $1.6m each (subject to the non-concessional contributions limits).

Are you affected?

Is your fund affected by this? Talk to us today, we may have a strategy to help you reduce the taxable proportion of your SMSF assets. Alternatively, if you’re thinking of commencing a TRIS we can help you navigate the tricky laws around this area and make sure you get the maximum benefit from your hard-earned superannuation.

In this global interconnected world, many Australians will no doubt leave Australia to work in many different countries in a vast array of professions. However, just because you leave Australia for a period time, that doesn’t mean that your Australian tax obligations are no longer relevant. Australian tax is based on the concept of “residency”. If you’re considered to be a resident of Australia then you will be taxed on your worldwide income with a tax offset available for any foreign tax paid.

To work out whether or not you’re a tax resident of Australia, there are several tests. The main test is the “resides” test under common law. This test is generally applied by considering your circumstances over the whole relevant year.

Rather than simply looking at the time spent in Australia, the question is whether your behaviour over a considerable period of time (6 months according to the ATO) has the degree of continuity, routine, or habit that is consistent with residing in Australia.

Some of the factors considered to be relevant in determining residency under this primary test include: your living arrangements (i.e. whether your usual place of abode is in Australia and whether you have family here, or whether any children are enrolled in school etc); the purpose, frequency and duration of visits to Australia; extent of any business/employment ties with Australia; extent of family/social ties with Australia; ownership of real estate in Australia; location of other assets and personal effects; where bank accounts are maintained; and nationality and citizenship.

As you can see, this primary test is entirely dependent on the individual circumstances of each case, and one change could sway the residency test one way or the other. It is also wholistic in that it encompasses almost every aspect of a person’s life and thus very complex to apply especially when you have to weigh certain factors against others.

If it is clear that you don’t satisfy the “resides” test, you will still be considered to be an Australian resident if you satisfy one of the following three statutory tests:

• Domicile and permanent place of abode – you will be considered to be an Australian resident if Australia is your permanent home (note permanent doesn’t mean everlasting or eternal but is rather contrasted with temporary).
• 183-day test – if you’re present in Australia for more than half of the income year, whether continuously or with breaks, then you will have constructive residence in Australia unless it can be established your usual place of abode is outside of Australia and you have no intention of taking up residence here.
• Commonwealth superannuation test – If you’re a member of a Commonwealth government superannuation scheme or have a relationship to a member of such a scheme then you will be considered to be a resident of Australia.

A person’s residency is determined on a year-by-year basis and the Commissioner may treat an individual to be a resident of Australia until it can be clearly established that they have cut all relevant ties with Australia. Residency is a complex area, if you’re unsure or you think you’re on the borderline of being an Australian resident, a tax professional should be consulted before you make any decisions with tax consequences.

Are you going to work overseas or thinking of working overseas?

Before you head overseas to work or start a business, come and see us, we can help you figure out if your individual circumstance would make you an Australian resident once you leave. Or if you no longer wish to be an Australian resident and would like to start overseas with a clean slate, we can help you with that, too.