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Increased international labour mobility and the use of skilled temporary workers by Australian companies have resulted in a growing number of foreign nationals entering Australia. These people generally hold a temporary visa for immigration purposes. It is important to recognise that holding a temporary visa does not automatically qualify a person for temporary resident tax status.

When someone who is a foreign national first arrives in Australia, they are either a resident or a non-resident for Australian tax purposes. Depending on their visa and circumstances, they may then qualify as a temporary resident. As the tax outcomes differ, it is important to recognise and plan for the key ramifications of becoming a temporary or permanent resident of Australia for tax purposes.

Temporary resident tax status: key concept

A person qualifies for temporary resident tax status if they hold a temporary visa granted under the Migration Act 1958 and they (and their spouse) do not have Australian resident status within the meaning under the Social Security Act 1991.

A temporary visa granted under the Migration Act 1958 is generally a visa that allows someone to travel to and remain in Australia during a specified period, until a specified event happens (eg until a temporary contract ends), or while the holder has a specified status. Under the Social Security Act 1991, an Australian resident is a person who resides in Australia and either is an Australian citizen, holds a permanent resident visa or is a special category visa holder. A person who has been an Australian resident within the meaning of the Social Security Act 1991 cannot be a temporary resident for tax purposes.

The word “resides” is not defined in the legislation and therefore takes on its ordinary meaning. Factors that determine a person’s residency status on entering Australia are outlined in Taxation Ruling TR 98/17.

Tax residency status is a question of fact and the test is determined on a case-by-case basis.

Becoming a permanent resident: key tax implications

When a temporary visa holder (who also qualifies for temporary resident tax status) continues to reside in Australia and is granted permanent residency in Australia, they will cease to hold the temporary visa for immigration purposes. Generally, this occurs on the issue date of the permanent visa. This is also the time when they cease to be a temporary resident and are treated as a tax resident of Australia. The tax implications of becoming an Australian tax resident are considered below.

A temporary resident who becomes a permanent resident in Australia may find themselves in a position where they are a dual resident, in Australia and their home country, for tax purposes.

Income taxable in Australia

When a person qualifies as a temporary Australian resident for tax, certain modified tax rules in Subdiv 768-R of the Income Tax Assessment Act 1997 (ITAA 1997) apply. Broadly, these rules provide the following outcome:

• The temporary resident is taxed on all Australian source income (eg employment income earned while working in Australia and interest from Australian bank accounts).
• Any foreign source income the temporary resident derives is not taxed in Australia, unless the income relates to remuneration for employment or services provided in Australia.
• Any interest the temporary resident pays to foreign residents (eg overseas lenders) is not subject to withholding tax. This type of payment usually occurs when a temporary resident has to continue meeting their existing loan obligations with foreign lenders while working in Australia.
• Broadly, temporary residents are subject to the same capital gains tax (CGT) rules as foreign residents. Therefore, if a CGT event happens to a CGT asset the temporary resident owns and the asset is not defined as taxable Australian property (TAP), there is no CGT liability for that person. TAP assets include direct and indirect interests in Australian real property. Any gains on TAP assets are taxable to the temporary resident. As temporary residents are treated as non-residents for CGT, they are not entitled to the 50% CGT discount on assets held for more than 12 months.
• If a temporary resident receives shares and rights under an employee share scheme during their employment in Australia, the discount amount is generally taxable in Australia, unless a portion of the discount relates to services they performed in relation to their employment outside Australia.
• When a person becomes an Australian tax resident, they are taxed on their worldwide income, including any capital gains arising from CGT events that happen to the CGT assets they own.
• A temporary resident who pays tax on income earned in Australia may also be taxed in their home country. If this is the case, they may be eligible to claim a foreign tax credit for tax paid.

Temporary residents are subject to tax at the same marginal tax rates as if they were tax residents.

Additional levies and tax offsets

In most cases, a temporary resident is exempt from paying the Medicare levy. However, from the day that the person becomes a tax resident they become liable for the Medicare levy.

When an individual becomes an Australian tax resident they become eligible to claim certain tax offsets under the Australian tax system that are not available to temporary tax residents, such as the low income tax offset and the private health insurance rebate.

Capital gains tax implications

When a temporary resident becomes an Australian tax resident, they are taken to have acquired each CGT asset they own for its market value at the time they ceased to be a temporary resident. This excludes TAP assets (which are already subject to CGT) and pre-CGT assets. When someone is granted permanent residency in Australia, this cessation date is normally the issue date of the visa. This means that CGT only applies to capital gains or capital losses that accrue to an asset after the person becomes a tax resident.

To access the CGT discount, the asset should be held for 12 months from the issue date of the permanent visa.

The main residence exemption

A person who sells a property that was their main residence before they became an Australia tax resident can generally claim the main residence exemption (Subdiv 118-B of ITAA 1997).

If the dwelling is not the person’s main residence for the entire ownership period, a partial exemption may be available, calculated as follows:

For the purposes of the exemption, the ownership period of the dwelling begins from the time the person acquired the dwelling – not when the person becomes a tax resident.

Conclusion

Taxpayers who qualify as temporary residents for tax are given concessional treatment under Australian legislation, with a more relaxed tax system in relation to their foreign income and gains earned while they work and reside in Australia.

If you hold a temporary visa and have temporary resident tax status, you should carefully review your position from time to time and inform your tax adviser of any changes in your circumstances. Becoming a permanent resident in Australia will have a significant impact on the tax treatment of any foreign income and capital gains, so you need to plan appropriately if you plan to apply for permanent residency and have foreign income or investments.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

WHEN IT COMES to leadership roles in business, accountants and finance professionals have an edge over other professions. Their insights and acumen are highly prized by the corporate sector, says Dr Byron Hanson, an associate professor at Curtin Graduate School of Business in Perth. “The language of business matters now. If you can’t speak finance, it’s very hard for you to be a CEO or senior leader,” he says. “I just see CFOs all the time being the heir apparent to large companies. They hold the cards that so many other people in the organisation don’t have.” Perhaps the not-so-good news is that accountants and finance professionals might have to unlearn some of the things that made them experts in the first place, in order to successfully make the transition to leadership.

Hanson has been researching the gaps in the training and skills of finance professionals, particularly with regard to leadership development. His paper, Leadership by the Numbers: Transitioning Finance Professionals to Leaders, was published earlier this year in Massachusetts Institute of Technology’s Sloan Management Review. Several years ago the CFO of a large company told Hanson he was concerned the business only had a 30% success rate in promoting finance people into leadership roles. What could be done to improve the situation?

Less can be more

In practical terms, it turns out that turning finance professionals into business leaders doesn’t just involve adding to their skill sets but can also involve subtracting, or at least downplaying, entrenched ones. “The first thing I would really encourage them to think about is what they need to unlearn,” says Hanson. “We so often think that leadership and learning is to keep on adding, but we have to unlearn some things and change their [finance professionals’] framing about how they’re seen – what they value, and what they have done day-to-day for success, is not going to make them successful in leadership roles.”

As part of his research, Hanson interviewed 35 finance professionals and he identified the five key leadership capability gaps as:

• strategic thinking
• influencing across boundaries
• motivating/empowering others
• leading and implementing change
• innovation

But he says such generic leadership skills can be a bit hit and miss for specific professions such as finance.

What’s often needed is for people to change from the dominant logic – the mind set or mental models – of their profession. In effect, they might have to shake off some of the ways of thinking that they learned over years, maybe decades.

Five transitions

Feedback indicates the dominant logic of finance professionals involves such things as factual thinking, attention to details, adherence to rules, and viewing things in a structured way. But Hanson argues there are five critical changes, or transitions, that finance professionals need to make to become successful business leaders.

1. Moving from being the expert… to leveraging expertise.

Hanson says finance people pride themselves on their expertise, which belongs to them and can seem like a secret language to others. But, despite what some people think, you don’t have to be the smartest person in the room to be a good leader. Making the most of your expertise can be more important for leaders, and he gives the example of leadership work he’s done with technology companies. “Tech people like to be the smartest Person in the room, they hate to lose their technical expertise,” he says. “And there’s a feeling of loss, ‘I’m no longer the person to go to for coding’. “They desperately try to hang on to that (expertise), at the expense of being the leader they need to be.” Hanson says finance people need to realise that the transition to leadership doesn’t mean a loss of expertise, but rather an opportunity to leverage the skills they’ve honed in a more valuable way.

2.  Moving from the apprenticeship model… to a coaching model.

Hanson says much of the finance profession, especially accounting, involves an “earn your stripes” style of learning and acquiring skills. In many ways, it’s a white collar apprenticeship. Junior finance professionals learn through observing and working with seniors whose oversight helps them avoid mistakes. If the work is complicated, the senior accountant might step in and comzplete it. A “doing the work for the team” approach and the apprenticeship model might help hone people’s technical skills but leadership involves coaching: less doing, and more motivating and influencing. But it’s a big ask for some people. Or as one survey respondent put it: “Typically, finance people are quite detailed oriented… it is in our DNA… it can be hard to delegate and let someone else get on with the detail.”

3. Moving from being a reporter… to a translator.

Hanson says finance professionals who step into leadership roles need to recognise that providing the numbers is not how they add value any more. Their leadership transition might instead involve creating meaning, simplicity and an informed point of view for their organisation to make better strategic choices. In effect, you can’t expect the numbers to speak for themselves or tell – or sell – a complex story. That’s a leader’s job: explaining financial data and translating it, communicating it and telling a compelling story, one that people can understand and follow. What might be obvious to a financial expert isn’t always clear to others. “I remember sitting in a session with a finance professional, and we were having an interesting debate about narrative,” Hanson says. “He said: ‘The numbers are right here, the numbers tell the story’. “And I said: ‘No they don’t. You (have to) tell the story’.”

4. From having the right answer… to navigating multiple answers.

For most finance people, delivering the right answer or set of figures iAdd News essential. But Hanson says leadership can be more ambiguous. Sometimes there may not be a right answer but multiple options. Finance professionals are taught to see problems as complicated but having a correct answer. Leaders might have to see things differently. He cites one CEO, who used to be a CFO, who says finance people sometimes come to him and say they’ve analysed things and have the answer to an issue, but without considering the bigger picture. “I tell them you’ve got to understand your environment and the context in which you’re presenting these numbers. And is that really the right, answer?” the CEO explains. “You need to unleash your thinking a bit.”

5. Moving from being a value protector… to value creator.

Hanson says the final leadership transition for finance professionals is to learn how to create wealth, rather than think in terms of being risk-averse and a protector of wealth. That’s because a leader’s success is often measured in terms of how much value they create. He quotes one former CFO who has made the transition to managing director: “Business leadership is trying to turn one dollar into two dollars and that is quite different… you can see (finance) people almost have a lightbulb moment sometimes when they’re transitioning between the two.” Hanson says finance people need to challenge their mind set. “Leadership is a little bit about risk taking and courage and making mistakes,” he explains. “Yet if you say to a finance person that it’s okay to make mistakes, they literally start to vibrate. “They go: ‘No, no, that’s not what we do’. “And you say ‘That’s not what you do – but that’s what leaders do’.”

The bottom line

Hanson says the bottom line is that finance professionals have a unique opportunity to become business leaders. When they make that transition they provide their organisations with a unique competitive advantage. He tells them that, in effect, they have a head start in two areas. “You speak a language that is going to matter more and more to businesses, you need to leverage that and believe that is something that nobody else really can bring,” Hanson says. The second thing that finance people bring is an understanding of the importance of values and ethics. “If you develop those things early, you are so geared for executive leadership roles, much better than other professions because you have both this language and understanding of what really matters.”

Article as seen at: ‘Five changes that will make you an exceptional leader’ Acuity (August 2016): 46-48. Print

Taxation Determination TD 2015/20, released by the ATO on 25 November 2015, explains the Commissioner’s view on whether a release by a private company of its unpaid present entitlement (UPE) constitutes a “payment” under the Div 7A shareholder loan rules, contained in Pt III of the Income Tax Assessment Act 1936 (ITAA 1936). The TD was issued to address uncertainty about the ATO’s position on whether the “release” or waiver of a UPE amounts to a deemed dividend.

The Commissioner’s view, as outlined in TD 2015/20, is that Div 7A can apply where a private company with a UPE from a trust releases all or part of that UPE, and the trustee is either a shareholder or an associate of the private company. That is, the ATO considers the crediting of an amount to be a payment under Div 7A if the release represents a benefit to an entity.

This article examines the application of Div 7A in the context of UPE releases and payments based on TD 2015/20. It does not cover Div 7A rules more broadly.

Division 7A

The Div 7A rules in Pt III of ITAA 1936 state that unless they come within specified exclusions, certain private company payments, loans and forgiven debts are treated as dividends paid. The rules can apply to payments by a private company to a shareholder or their associates.

A payment is not treated as a dividend where, for example:

• it is fully repaid or converted to a complying loan by the company’s lodgment day for the income year in which the payment occurs; or
• it is assessable income (or is specifically excluded from being assessable income) under another part of the Act.

Principles outlined in TD 2015/20

TD 2015/20 provides that if a company releases a UPE, the release will typically be a payment under Div 7A, and therefore a potential deemed dividend, if the release is a benefit to the entity.

A UPE is a beneficiary’s right to receive trust income or capital that:

• arises due to the beneficiary being made presently entitled to the amount; and
• has not been satisfied, paid or effectively disclaimed.

According to TD 2015/20, there is a deemed dividend to a shareholder (or an associate of a shareholder) under Div 7A if:

• there is a payment (according to the meaning in s 109C of ITAA 1936); and
• that payment constitutes the release of a UPE as the result of an amount credited by the company for the benefit of the trust.

There must be a payment

Broadly, a private company is taken to have paid a dividend to a shareholder at the end of an income year if the company pays an amount to the entity during that year (s 109C(1) of ITAA 1936). For the purposes of Div 7A, a payment includes a credited amount to the extent that it is to the entity, on behalf of the entity or for the benefit of the entity (s 109C(3) of ITAA 1936).

The release involves crediting

Two requirements must be satisfied for the release of a UPE by way of a credit to be considered a “payment” and therefore a deemed dividend under the Div 7A rules:

1. Credit must have been provided by the private company. The income tax legislation does not define the term “credit”, so it must be interpreted according to its ordinary meaning. The Macquarie Dictionary defines “credit” as “enter[ing] upon the credit side of an account; giv[ing] credit for or to; giv[ing] the benefit of such an entry to (a person, etc)”. Based on this, the Commissioner views the forgiveness of a debt in a company’s accounts, accompanied by an intention not to recover the debt to constitute “crediting of an amount”, which falls within the Div 7A meaning of “payment”. Crediting does not need to be formally recorded in the company’s books of account.
2. The credit must be applied for the benefit of the entity. According to TD 2015/20, a UPE is an asset that stands as a debit entry in a private company’s accounts. The Commissioner’s position is that a “benefit” is provided where a UPE is released by the private company, because it leaves the other entity (eg the trustee of a trust) with full ownership of the UPE. A UPE release is considered a payment irrespective of whether it is held in the main trust or in a subtrust, or whether the UPE is released voluntarily or at the direction of a court order.

Exceptions: where the release of a UPE does not give rise to a benefit

The release of a UPE does not give rise to a benefit and would not be considered a payment under the Div 7A rules if:

• the trustee cannot satisfy the UPE due to circumstances beyond its control, and the beneficiary has no cause of action against the trustee to recover that loss; or
• the UPE is already a Div 7A loan or has previously been converted to a debt (s 109F of ITAA 1936).

Conclusion

The Commissioner’s position, according to TD 2015/20, is that the deemed dividend rules in Div 7A can apply where a private company with a UPE to the income or capital of a trust releases all or part of the UPE, and the trustee is either a shareholder of the private company or an associate of a shareholder.

When writing off or releasing a UPE, corporate beneficiaries should therefore be careful to ensure no benefit is provided through the release and a payment under Div 7A does not arise. As TD 2015/20 applies both before and after its date of issue, taxpayers should review the information carefully to manage any possible Div 7A risk.

It is relatively common for a taxpayer to inherit residential property under a will. While an inherited dwelling can be a wonderful gift, it often results in capital gains tax (CGT) implications, particularly where the taxpayer later sells the property. Individuals who inherit deceased estates therefore need to be aware of how the CGT rules work.

Generally, a CGT liability arises when a capital gain is made on the sale of a property. However, a taxpayer may be fully or partially exempt from CGT if the transaction involves the sale of a deceased person’s main residence, provided certain conditions are satisfied.

This article examines the rules surrounding application of the CGT main residence exemption contained in the tax law, in the context of a beneficiary selling a dwelling they acquired from a deceased estate.

Main residence exemption: basic rules

The main residence exemption rules appear in Subdiv 118-B of the Income Tax Assessment Act 1997. They provide that a capital gain or loss made on the disposal of a dwelling is generally disregarded for CGT purposes if the dwelling is a main residence of the taxpayer throughout the ownership period.

The tax legislation defines “ownership” as a legal or equitable interest or a right or licence to occupy the land or dwelling. The ownership period of a dwelling is the period during which the individual had an ownership interest in the dwelling or land.

The definition of “dwelling” includes a unit of residential accommodation, a caravan or a houseboat, and a dwelling can be made up of more than one unit of accommodation – for example, a house with a granny flat – provided they are used together as a single residence (see Taxation Determination TD 1999/69).

The main residence exemption is only available to natural persons, so it does not apply where a company or trust owns a residence, except where the residence is vested in the trustee of a deceased estate and it is the main residence of a surviving spouse.

Deceased estates and main residence

For a beneficiary taxpayer who inherits a dwelling to have access to the main residence exemption, the dwelling must have been a “main residence” of the deceased person at the date of their death. This generally means the person lived in the dwelling and it was their main residence during their lifetime, or the person stopped living in the dwelling but continued to treat it as their main residence during their lifetime. This could occur, for example, when the person lived in a retirement home or aged care facility during their later years.

A taxpayer who inherits a main residence and subsequently sells the property may be able to access either full or partial exemption from CGT. The conditions to be satisfied to access the exemption depend on whether the deceased person acquired the dwelling before or after 20 September 1985:

Full CGT exemption

Deceased person acquired the dwelling before 20 September 1985 and beneficiary acquired it after 20 September 1985

Where the dwelling is a pre-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling if either of the following applies:

• condition 1: the taxpayer disposed of the property within two years of the deceased person’s death; or
• condition 2: the disposal did not occur within two years, but from the date of the death until the time of the sale, the dwelling was not used to produce income and it was the main residence of the surviving spouse, an individual with a right to occupy the home under the will, or a beneficiary of the estate.

There is no requirement for a pre-CGT dwelling to have been the main residence of the deceased person.

The Commissioner of Taxation has discretion to extend the two-year period under certain circumstances.

Deceased person acquired the dwelling on or after 20 September 1985

Where the dwelling is a post-CGT asset in the hands of the deceased person, the taxpayer can disregard any capital gain or loss on the sale of the dwelling, provided certain conditions are met. There are different conditions depending on whether the taxpayer acquired the post-CGT dwelling before or after 20 August 1996.

Where the dwelling passed to the taxpayer on or before 20 August 1996, the full exemption is available if:

• the dwelling was the deceased person’s main residence for their entire ownership period during their lifetime and they did not use it to produce income; and
• condition 2 (described above) is met.
• Where the dwelling passed to the taxpayer after 20 August 1996, the full exemption is available if:
• the dwelling was the deceased person’s main residence just before their death and it was not being used to produce income at that time; and
• either condition 1 or condition 2 (described above) is met.

Illustrative example 1 Andrew was the sole occupant of a home he bought in Coburg, Victoria, in December 1998. It was his main residence throughout his ownership period. Andrew died in April 2011 and left the house to his only daughter, Leanne. Leanne rented out the house for a short period, then sold it 18 months after her father died. Is Leanne entitled to the full CGT exemption? Yes, because she disposed of it within two years of her father’s death, it was her father’s main residence just before his death and it was not used to produce income at that time.

Partial CGT exemption

Where a dwelling was not the deceased person’s main residence during the full period of their ownership, a full or part exemption from CGT may be still available. The taxable capital gain or loss amount is calculated according to a formula prescribed in the legislation:

Term	Pre-CGT dwelling	Post-CGT dwelling
Non–main residence days	The number of days from the deceased person’s death until the disposal date, when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy it under the will, or the beneficiary	The sum of (a) the number of days after the date of the death when the dwelling was not the main residence of the surviving spouse, an individual with a right to occupy under the will or the beneficiary, and (b) the number of days during the deceased person’s ownership period when the dwelling was not their main residence.
Total days	The number of days from the deceased person’s death until the date of the dwelling’s disposal	The number of days from the date the deceased person acquired the dwelling until the date of its disposal

If the ownership interest is disposed of within two years of the deceased person’s death, the taxpayer can ignore the non-main residence days and total days in the period from the date of death until the date of disposal if this reduces the tax liability.

Cost base of the dwelling

Where the dwelling was a post-CGT asset of the deceased person, the taxpayer inherits the deceased person’s cost base. If it was a pre-CGT asset of the deceased person, the taxpayer is taken as acquiring the dwelling for its market value at the date of the death.

Illustrative example 2 Zoe bought a house on 8 October 1995 and used it solely as a rental property. When Zoe died on 7 June 2005, the house passed to her son, John, and he used it as his main residence. John then sold the house in November 2009, making a capital gain of $250,000 from the sale. Is John eligible for the full CGT exemption? No. Zoe never used the property as her main residence, so John cannot claim the full exemption for a main residence. Is John eligible for the partial CGT exemption? Yes, because he used the house as his main residence. John must use the prescribed formula to calculate the taxable portion of his capital gain. Zoe owned the house for 3,531 days. John then lived in the house for 1,635 days. This gives 5,166 total days. Zoe used the house as a rental property from the time she acquired it, so there were 3,531 non-main residence days. Using the formula, the taxable portion of John’s capital gain is $170,876 ($250,000 x (3,531/5,166)). On the basis that he is eligible to access the 50% CGT discount, John has a capital gain of $85,438.

Talk to us

Do you think the full or partial CGT exemption could apply to your circumstances? Please contact our office on (02) 9954 3843 for further information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/

The ATO – as the regulator of SMSFs (self-managed super funds) – has a range of treatments available to it to deal with SMSF trustees who have not complied with the super laws. The ATO says its primary focus is to encourage SMSF trustees to comply with the super laws. However, SMSF trustees should be aware of the range of penalties or actions that the ATO could apply in the event of a contravention.

These include the following actions:

• Education direction – the ATO says it may give an SMSF trustee a written direction to undertake a course of education when they have been found to have contravened super laws. The education course is designed to improve both the competency of SMSF trustees and their ability to meet their regulatory obligations, and to reduce the risk of trustees contravening the law in future.
• Enforceable undertakings – the ATO can decide whether or not to accept an undertaking from an SMSF trustee to rectify a contravention. The undertaking must be provided to the ATO in writing and must include the following:
  • a commitment to stop the behaviour that led to the contravention;
  • the action that will be taken to rectify the contravention;
  • the timeframe to rectify the contravention;
  • how and when the trustee will report that the contravention has been rectified; and
  • the strategies to prevent the contravention from recurring.
• Rectification directions – the ATO may give a trustee or a director of a corporate trustee a written direction to rectify a contravention of the super laws. A rectification direction will require that a person undertakes specified action to rectify the contravention within a specified time, and provide evidence of compliance with the direction.
• Administrative penalties – from 1 July 2014, individual trustees and directors of corporate trustees will be personally liable to pay an administrative penalty for various contraventions of the super law (breaching the SMSF borrowing rules or the in-house asset rules etc). The penalty cannot be paid or reimbursed from the assets of the fund.
• Disqualification of a trustee – the ATO may disqualify an individual from acting as a trustee or director of a corporate trustee if they have contravened the super laws. The ATO can also disqualify an individual if it is concerned with the actions of that individual or if it doubts they are suitable to be a trustee.
• Civil and criminal penalties – the ATO may apply through the courts for civil or criminal penalties to be imposed. Civil and criminal penalties apply where SMSF trustees have contravened provisions relating to these:
  • the sole purpose test;
  • lending to members;
  • the borrowing rules;
  • the in-house asset rules;
  • prohibition of avoidance schemes;
  • duty to notify the regulator of significant adverse events;
  • arm’s length rules for an investment;
  • promotion of illegal early release schemes.
• Allowing the SMSF to wind-up – following a contravention, the trustee may decide to wind-up the SMSF and rollover any remaining benefits to a fund regulated by the Australian Prudential Regulation Authority (APRA). Depending on the actions of the trustees and the type of contravention, the ATO may continue to issue the SMSF with a notice of non-compliance and/or apply other compliance treatments.
• Notice of non-compliance – serious contraventions of the super laws may result in an SMSF being issued with a notice of non-compliance by the ATO. A notice of non-compliance is effective for the year it is given and all subsequent years. A fund remains a non-complying fund until a notice of compliance is given to the fund.
• Freezing SMSF assets – the ATO may give a trustee or investment manager a notice to freeze an SMSF’s assets where it appears that conduct by the trustees or investment manager is likely to adversely affect the interests of the beneficiaries to a significant extent. This is particularly important when the preservation of benefits is at risk.

Informal arrangements

The ATO says it may take one or several courses of action, depending on how serious the contravention is and the circumstances involved. In some circumstances, the ATO may enter into an informal arrangement with a trustee to rectify a minor contravention within a short period of time. The arrangement can be made verbally or in writing and includes how and when the contravention will be rectified. The ATO will consider the trustee’s compliance history in deciding whether to accept the arrangement. The ATO may also provide trustees with informal education about their trustee obligations.

ATO identification of risk posed by SMSFs

The ATO will apply a risk-based approach in response to auditor contravention reports (ACRs). The Commissioner said he will consider multiple indicators and use risk models to determine the appropriate action to take on each SMSF. The key indicators used will include non-compliance (including regulatory and income tax matters), information from the SMSF annual return, ACRs, and other data, including trustee and members’ records.

Under this approach, the ATO will treat all ACRs received with an audit, phone call or letter, shortly after lodgment, to provide more certainty to trustees. The ATO said this approach also recognises the increased SMSF auditor professionalism stemming from the new ASIC registration regime, warranting less intrusive action in many cases.

The ATO’s risk categories for SMSFs include the following:

• High-risk SMSFs – will be selected for comprehensive audits that will see scrutiny of all regulatory and income tax risks displayed by the fund. There will be a particular focus on repeat offenders. This program will also involve an increasing number of ATO field visits to engage high-risk SMSFs. ATO administrative penalties for breaches by an SMSF trustee (up to $10,200 per breach) will be applied when the Commissioner confirms the breach is eligible for such a penalty.
• Medium-risk SMSFs – the ATO will take less intrusive action on SMSFs assessed as medium risk. As trustees are responsible for their fund’s behaviour, the ATO says it will engage directly with trustees to discuss the reported contravention, remind trustees of their obligations, and encourage compliance in future. This action will usually occur within six to eight weeks of the ACR lodgment. In the majority of cases, if the trustee can assure the Commissioner that they understand their obligations, the issues reported in the ACR will be closed and no penalties applied. The ATO’s aim is to intervene before more serious comprehensive audits are required.
• Lower-risk SMSFs – will be issued with tailored correspondence reminding the trustees of their obligations and encouraging compliance in future. The issue reported in the ACR will be closed with the issuing of this letter which will usually occur within six to eight weeks of the ACR’s lodgment.

Want to know more?

Please contact our office on (02) 9954 3534 or email admin@hurleyco.com.au for more information.

Article as seen at http://checkpointmarketing.thomsonreuters.com/