ATO compliance update for self-managed superannuation funds

Feb 28, 2013

Address by Alison Lendon, Deputy Commissioner Superannuation, ATO
2013 SPAA SMSF National Conference
Friday 15 February, Melbourne Convention and Exhibition Centre


Thank you for inviting me to speak at your conference. Although I've been unable to be here at the conference until now (due to Senate Estimates) I've had several ATO staff here. It's clear from their observations that the level of attendance, quality of the presentations and discussions is testimony to the significance of this growing sector of the super industry and SPAA's commitment to enhancing the knowledge and skills of SMSF Professionals. I congratulate you on your 10-year celebrations and, on behalf of the ATO, look forward to continuing to work with SPAA over the next 10 years and beyond.

Recently moving into the superannuation arena, I am struck by the breadth, diversity and complexity of the super system. Our aim in the ATO is to make it function more efficiently and effectively and in achieving this goal I cannot overstate how important it is that we work together.

The ATO and SPAA - an ongoing relationship

The ATO recognises the growing importance of the SMSF sector and the professionals who work in the industry. We have a close and productive working relationship with SPAA and appreciate that you are very active in representing the interests of your members to the ATO. We welcome these views. We also consult with a broad spectrum of the population.

I've said in the past that we 'seek to harness the ideas and creativity of our main stakeholders - that is our community - and of course, our own staff. We consult widely with community, industry and practitioner groups. By listening, and being seen to be listening, we are showing that the tax system is a community asset and, at the same time, acknowledging that the ATO doesn't have all the solutions'.1

SPAA plays an important advocacy role through its membership of ATO consultative committees, including the Superannuation Consultative Committee and its subcommittees that focus on strategic issues for the super system. Members include peak bodies, industry associations, regulators and super funds. SPAA has recently joined the National Tax Liaison Group (NTLG) as a standing member. For those who may not be familiar with the NTLG, it is the ATO's peak consultative forum to discuss and resolve strategic issues relating to tax and super laws.

SPAA has also played a leading role in the consultation and design process for the current super reforms. I'd like to thank you and your representatives for your level of engagement over the years, and particularly for your interest, via the current reform process, in helping to realise a better future for Australia's super system. We acknowledge the dedication of the team at SPAA and in particular, I'd like to thank Andrea Slattery and Peter Burgess.

SMSFs - the state of play

As most of you here today are aware, the SMSFs comprise the largest sector of the Australian super industry. In the four years to 30 June 2012, they contributed the largest proportion to the growth in total super assets. As at December 2012, total SMSF assets were estimated to be $474 billion. At the ATO we're certainly doing all we can to support such a valuable industry in as many ways as possible.

A key aspect of our compliance approach is to help SMSF trustees understand their obligations and keep them up to date with changes to the law. We recommend trustees' and professionals' first port of call is always our website and publications. There are now nearly 30,000 subscribers to our free quarterly publication SMSF News (it has the second-biggest subscriber list in the ATO). Through these subscribers we can potentially learn more about the needs of the SMSF market, via reader feedback and queries for example, and also through focus groups.

We're also adding a new publication to our popular SMSF lifecycle suite: the keenly anticipated Paying benefits from a self-managed super fund will be released shortly; it will assist you and your trustees in retirement phase. Our website is also a great way to keep up to date with the changing super landscape, subscribe to SMSF News and download or order other publications.

Trustees of SMSFs are responsible for running their funds in accordance with the strict requirements that accompany the concessional tax treatment applied to super funds. The ATO's role is to ensure that trustees comply with these obligations. This year, the focus of our compliance monitoring, as published in our Compliance Program 2012-13, has been on:

  • engaging new trustees, to ensure they can operate their SMSF and are not seeking to illegally access their retirement benefits
  • ensuring lodgment of fund annual returns to improve timeliness and also, in the case of new funds, to ensure they are entitled to receive their notice of compliance
  • reviewing irregularities in exempt current pension income and non arm's- length transactions
  • examining re-reporting of contributions and compliance with excess contributions tax release authorities
  • reviewing all breaches of trustee obligations reported to us by approved auditors.

Where trustees have committed less serious breaches in their obligations, we work with them to rectify and unwind transactions so that the fund can continue to operate legitimately. In more serious cases we take firmer action, including imposing penalties, making funds non-complying (with the loss of concessional tax treatment), disqualification of trustees and prosecution.

Trustees or their advisers can also write to us for further advice if they need. We can provide written general guidance about the broad operation of the law, which often provides step-by-step support for many situations.

If a trustee wants a written explanation of our view on how the super laws apply to their SMSF, they or their authorised representative can apply for SMSF specific advice. While this advice isn't legally binding, it will provide certainty to trustees about the application of the super laws to their fund. If we later take the view that the law applies less favourably to an SMSF, the fact that trustees acted in accordance with the advice would be an important factor in their favour. Details of how to apply for SMSF specific advice can be found on our website.

The most common topics we are asked about for specific advice are:

  • working through the scenarios regarding acquisition of business real property from related parties and confirming the interpretation of business real property
  • understanding the conditions relating to investing in related unit trusts so that they are excluded from the in-house asset tests
  • following the release of the ruling for limited recourse borrowing arrangements (LRBAs) last year, we received enquiries about what's an improvement or a repair, the acquisition of assets from related parties and low interest loans for LRBAs
  • we've also seen an increase in requests about collectable and personal use assets since the regulations were introduced, especially around storage and insurance and gold bullion.

Another type of advice we can provide is an SMSF product ruling. This is public written advice about how the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations (SIS Regulations) apply to an arrangement where a number of SMSFs individually enter into substantially the same transactions with a common entity or a group of entities. The promoter or manager of the product may apply for a product ruling on behalf of the participating SMSFs.

We have delivered on our undertaking to improve the quality of information available about the SMSF sector and have now published our third annual set of statistics: Self-managed super funds: a statistical overview 2010-11. We continue to explore the ongoing design of our data collection in consultation with the SMSF working group, a group consisting of industry professionals. The focus is on improving statistical data and streamlining the reporting requirements of SMSFs. 

Our analysis shows not only growth in SMSF numbers, assets and members but also the performance of SMSFs in recent years. For the 2011 year, the estimated return on assets (ROA) for SMSFs of 7.7% (in line with the previous year) is similar to the ROA for APRA-regulated funds, which was 7.8%.

While SMSFs are an increasingly well run market, we do need to remain vigilant. The growing number of SMSFs underlines both the need for trustees running funds to understand their obligations and, as I've already said, for the ATO to deepen its knowledge of the sector. Improving the quality of statistics about the industry is part of the government's broader reform agenda. And this is what I'd like to talk about next.

Super reform

Related party transfers

Last December the government released for public consultation draft legislation and explanatory material on the acquisition and disposal of certain assets by SMSFs and related parties. The relevant Bill is currently before parliament with the law expected to begin on 1 July this year.  

The draft legislation broadens the types of assets currently prohibited from being acquired from a related party but provides more transparent exceptions whereby the relevant acquisition will be permissible. By way of example, the acquisition of business real property will be prohibited unless acquired at market value as determined by a qualified independent valuer. Similarly, listed securities acquired from a related party will also be prohibited unless they are acquired in a way that is prescribed.

The draft legislation also introduces a prohibition on the disposal of SMSF assets to a related party, unless similar exceptions are satisfied.

The regulations, which are yet to be released, will provide further detail about the exceptions in the Bill. Individuals and the profession will have an opportunity to comment on the draft regulations when they are released for public consultation.

This measure will provide greater transparency to related party acquisitions and disposals, enabling SMSF approved auditors and the Commissioner of Taxation, as regulator, to monitor these transactions more effectively, and therefore provide greater community confidence in the SMSF sector.

Valuation guidelines

We released Valuation guidelines for self-managed superannuation funds last August and have had over 37,000 hits to the page. The publication was developed to guide trustees and their advisers on existing and new valuation requirements and to help promote a consistent approach across the sector. As with many of our publications, the guide will be reviewed regularly to ensure currency.

We've had very positive feedback on the guidelines, including in the media. As one writer commented, 'It is quite a handy document to view online and could help you to identify when you need to use market values, and who can determine them for you'.2

SMSF compliance treatments

Legislation was introduced into the House of Representatives last November giving the ATO effective, flexible and proportionate powers to address non-compliance by SMSF trustees.

These powers form part of a suite of reforms announced by the government in response to the Super System Review. The new powers, which can be used in conjunction with existing powers, are:

  • directions to trustees to undertake education
  • directions to rectify contraventions
  • administrative penalties for contraventions of super legislation.

These will apply to contraventions by SMSF trustees from July. If a fund has compliance issues, I recommend trustees resolve them as soon as possible. 

Accurate reporting is important for good administration. Having publicly released our guidance on the application of penalties for false or misleading statements that do not result in a tax shortfall last August 3, we're now applying those penalties in appropriate cases of incorrect SMSF reporting.

A focus of our compliance work is loans cases and we expect this to continue. In addition to the administrative penalties we can impose, I'd like to highlight a recent prosecution case (that ended in a term of imprisonment) which serves as a salutary example of what can happen when people knowingly and repeatedly do the wrong thing.

A husband and wife established an SMSF and between December 2004 and November 2007 they paid out most of the money in the fund. Their accountant, who was also their tax agent and approved auditor, warned them in the clearest terms in September 2006, they could not do this and that he had to report their action to the ATO. The husband continued to pay himself or his wife contributions as they were made by his employer into the fund. Even though he and his wife paid the tax and penalties on the money withdrawn from the fund they were still liable for prosecution. The court found the husband guilty and imposed a sentence of six months imprisonment; released on security, he served 14 days.    

As the judge in the case pointed out, the legislation governing SMSFs is enacted to promote the welfare of the community. Retirees have access to their fund on retirement and by administering their own fund they avoid paying the cost of professional fund managers. This is simple. Trustees should not help themselves to their super until they meet a condition of release.

Illegal early release (IER) of super benefits will be further curtailed when new civil and criminal powers to prosecute people who promote IER schemes are introduced. The promoter penalty provisions will begin on royal assent; however debate on this bill was adjourned this week so I can't provide any further detail. A bill has also been introduced into Parliament to tax illegally released benefits at 45% from 1 July.

As you know, we haven't prosecuted many cases. However, we also don't hesitate to consider that action where it seems appropriate. At the moment we have over 25 cases at all stages from initial to advanced, to investigation, although of course only a limited number will ultimately proceed. Our Superannuation Prosecution Strategy is published on our website.

SMSF levy

The government will bring forward payment of the SMSF levy so that it's levied and collected in the same year of income. This will ensure consistency with APRA- regulated funds. This change in the timing will be phased in over two years: 2013-14 and 2014-15. The levy will increase from $191 to $259 per annum from 2013-14 onwards. 

SMSF bank account validation

If you missed the session on Wednesday, new integrity measures have been proposed which will further curtail IER and associated fraud; these activities erode retirement savings and reduce the integrity of the super system. We've made considerable progress to combat IER over the past few years, with improved education, better up-front SMSF registration checking and strengthening the rollover checks conducted by APRA-regulated funds. As a result, it's now much harder for people to engage in IER and associated fraud. For example, in 2011-12 no new promoters were identified and we prevented 725 funds from operating.

Industry groups, including SPAA, have played an important role in the design of sensible and practical solutions which have been key to the success of these initiatives.

The proposed measure builds on work already done by further strengthening the SMSF registration and rollover process. Central to this will be the new ability for APRA funds to check and confirm an SMSF's bank account details with us before completing a rollover.

Subject to legislation, from 1 July 2014 SMSF trustees will need to ensure that their bank or financial institution provides the fund's bank account details to the ATO. This will apply to all new SMSFs established from that date and to existing SMSFs receiving rollovers from APRA-regulated funds.

SMSF adviser details

The SMSF registration process will also be modified to capture details of individuals providing advice on the establishment of an SMSF. This change is to support the proposed licensing of SMSF advisers and service providers with ASIC.

Data and e-commerce standard

The new data and e-commerce standard ('the standard') will facilitate more consistent and reliable electronic transactions of data and payments for super, helping to improve the efficiency of the super system and to reduce lost accounts and unclaimed monies.

The legislation, which sets out the requirements under the standard, became law on 28 June 2012 and the supporting regulations and legislative instruments have now been registered.

As part of the standard, to facilitate electronic interactions between employers and funds, funds accepting contributions will need to process these electronically and supply an electronic service address for the delivery of the contributions data message.

The standard will apply to contribution payments starting from 1 July 2014.

All large and medium employers (those with 20 or more employees) will use the standard for sending contributions from 1 July 2014. This means all super funds, including SMSFs, will be required to receive contributions via the new standard from 1 July 2014. All small employers (those with fewer than 20 employees) will have to use the standard for sending contributions from 1 July 2015.

It's also expected, subject to government policy, that SMSFs will be brought into the standard-based framework for rollover payments from January 2015. Details are still to be confirmed by government and new regulations will be required to facilitate the change.

Compliance statement

We will publish a compliance statement soon to support the new standard. It will provide guidance on the compliance approach we expect to take for the standard. You can expect our main messages to be:

  • our emphasis during the first 18-24 months will be on education and support
  • we will look to see that reasonable care and attention is applied to adopt the standard
  • we anticipate it will take time to bed down the new arrangements
  • we would only apply penalties in this period to those showing wilful disregard for their obligations and would use administrative flexibility in dealing with those who are attempting to do the right thing.

What you need to do

Design work is currently underway to identify accessible and affordable options for SMSFs to accept contributions, and later on process rollovers, in accordance with the new standard. Ultimately you will need to nominate a receiving bank account for electronic payments and a service address for electronic messages.

We have invited software developers to register their intent to support the new standard in their products on the ATO Software Developers Homepage Product Register. Available for the public to view, this will list the software developers that have registered their intent to have a software product which will enable SMSFs to meet the standard. We expect administrators, banks and other service providers will either partner with these developers or put their own solutions in place.

We're also working on a comprehensive communications program to inform SMSFs, their agents and super professionals of the changes and what will need to be done to continue receiving contributions and rollovers.

The changes stemming from the introduction of the mandatory standard are significant. Trustees and their advisors should be prepared and proactive. We encourage trustees to speak to their software providers, administrators or financial institutions to make sure they are up to speed on what the changes are and to determine what options are available for funds.

Future changes

There will also be changes occurring in the longer term. You'll appreciate that the size and scale of the Stronger Super package means that some of the changes will require more time to implement. Some are tied closely with improvements to industry infrastructure, such as the enhancement to the 'back office' of super (SuperStream) and changes to reporting. There will also be changes to registration requirements relating to the capture of SMSF advisor details. 

Approved auditors

There is another change impacting on the administration of SMSFs this year.  Approved auditors now need to register with ASIC. Yesterday, Greg Tanzer talked about the registration process and the ongoing role of ASIC and the ATO. SMSF auditor registration recognises the critical role auditors play in ensuring the sustainable operation of the SMSF sector.

The ATO will continue to maintain our focus on the compliance and skills of SMSF approved auditors and we are increasing our efforts to engage and support them. Our aim is for all SMSF approved auditors to understand their obligations and the issues they need to consider when auditing an SMSF, basically ensuring they complete quality audits. To support this aim we provide the usual range of web and print content as well as investing in our products, for example:

  • we're updating the Roles and responsibilities of approved auditors guide to provide even more information about the roles and obligations of SMSF approved auditors. It includes details of their responsibilities under super legislation, the expectations of an SMSF audit and templates to assist in an audit
  • we continue to enhance the free downloadable eSAT tool, which is now a primary source of support and assistance for many auditors. We've found that auditors using eSAT are more likely to consider relevant aspects of an audit and report correctly. One of our key objectives has been to increase the take up and usage of the tool. Latest auditor contravention report (ACR) data indicates that last quarter, for the first time, 50% of ACRs were lodged using eSAT, surpassing paper and the portal combined
  • we're investigating the viability of expanding the Super Professional 2 Professional service, a unique email technical support service we currently provide to the 100 largest-scale SMSF approved auditors, to the 300 largest scale SMSF auditors (this would cover about 40% of the SMSF population).

One change we've made is to the treatment of approved auditors found to be failing their obligations. From this month, we've stopped disqualifying approved auditors and referring them to their professional association; we now refer them to ASIC for investigation. We've been working closely with ASIC regarding approved auditor compliance, will continue to do so and are currently progressing a number of cases with them.

In our monitoring role, the critical question we ask is 'are auditors fulfilling their role by ensuring SMSFs meet their obligations, and reporting to us those who don't'. In considering this, we look at:

  • lodgment and other data available to us across the tax and super system to identify areas of potential risk
  • the results of our compliance reviews of SMSF funds and comparing these with SMSF auditor reporting
  • ACR reporting and trend analysis.

We risk assess the entire SMSF approved auditor population based on all of these and other intelligence we receive. From this risk assessment we select cases that warrant detailed review. We've recently reduced our compliance checks to focus primarily on the highest risk approved auditors. This is in recognition of the need to increase our support and assistance to the industry in the transition to ASIC SMSF auditor registration.

Our assessment is that most auditors try to do the right thing and generally succeed. The cases we select for review are our higher risk cases; these are most likely to have a compliance outcome of some sort.

Where we find issues that aren't critical or fraudulent we focus on providing support and assistance. If the auditor does not respond, or isn't willing to change, we encourage them to leave the system. For critical issues we take firmer action, referring auditors for disciplinary action and/or disqualifying them. This role now belongs to ASIC of course.

Last October, an approved auditor was convicted in relation to their failure to comply with a requirement of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This is the first time the ATO has successfully prosecuted under section 285 of the Act arising from a person's failure to comply with the requirements of a notice issued under section 255.

We prosecuted the auditor because they failed to work with us - not returning phone messages or responding to the audit notification. We eventually issued a notice under section 255 of the SIS Act asking for audit documentation which the auditor failed to respond to appropriately. The auditor pleaded guilty and was convicted and fined $1200 and ordered to serve 12 days imprisonment.

In addition, as a result of this behaviour and other issues with the auditor's compliance as a business and employer the auditor was found to not be a fit and proper person and was disqualified from being an approved auditor of a regulated super entity in accordance with subsection 131(1) of the SIS Act.

Since 2006, overall auditor numbers have declined and the average number of audits undertaken by them increased. This is significant, as our reviews have found that smaller-scale less experienced auditors are more likely to fail to meet their obligations.  We estimate that there are about 10,000 active approved auditors. We expect this number will reduce, perhaps significantly, over the coming year or so as micro-scale auditors exit the system due to the requirements of the ASIC SMSF auditor registration process.


In addition to our usual lodgment work, which we've discussed regularly in speeches, forums and workshops over the past year or so, this year we'll implement some new approaches. All SMSFs with two or more years of overdue lodgments will have their regulation details removed from Super Fund Lookup (SFLU). This will restrict their ability to receive rollovers from APRA funds. The regulation details will be kept off the SFLU register until lodgments are up to date.

Limited recourse borrowing arrangements (LRBA)

There continues to be considerable interest in LRBAs for SMSFs. We're working closely with the sector, including SPAA, to ensure that arrangements entered into by SMSFs comply with the law.

Exempt current pension income (ECPI)

ECPI is a major tax concession for funds, and as more SMSFs convert to pension phase we expect to see more and more income exempt from tax. There's been considerable discussion in the media and industry on the consequences of not satisfying the minimum pension payment requirements within the SIS Regulations. The news that is not well known is that in certain circumstances, the ATO can now apply the Commissioner's general powers of administration to allow funds to claim ECPI, even when the minimum pension standards under the SIS Regulations haven't been met.

Generally, if the situation is rectified as soon as possible, the fund may be able to continue to treat the pension as being in place, if: either the pension shortfall is under one-twelfth of the minimum pension requirement or the failure to meet the minimum payment was outside of the control of the trustees. 

In January, we published a Q&A document - Self-managed superannuation funds - starting and stopping a superannuation income stream (pension) - on our website to highlight the conditions that would need to be satisfied to allow an SMSF to continue to claim ECPI. (There's a separate Q&A for APRA-regulated funds.) I encourage you to have a look at this.

I would also encourage you to read Draft Taxation Ruling TR 2011/D3 Income tax: when a superannuation income stream commences and ceases even though finalisation of this ruling is pending outcomes following the 2012-13 MYEFO announcement on Tax certainty for deceased estates

Essentially, the government announced that the law will be amended to allow the income tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a member in the pension phase until the deceased member's benefits have been paid out of the fund. These proposed amendments are to apply for the 2012-13 and later income years.

New services available

SuperSeeker got a facelift and became part of the suite of services available through our website. We now have an integrated online service for Individuals and Super is the first element to be deployed.

Right now members can:

  • view active and lost super accounts
  • view ATO-held super money (eg unclaimed super money)
  • request the transfer of super accounts to consolidate the number of accounts a member holds (via the electronic portability form)
  • request to transfer ATO-held super money to a super account (online fund nomination).

In April, our online service will be upgraded to let people change/update personal details such as their address, check the progress of an income tax return and make an online payment arrangement.

Online registration for the service is based on shared secrets, ie information that has previously been shared with the ATO or generated by the ATO (eg information on the income tax notice of assessment and the PAYG summary). Individuals will create a password after successful registration. It's easy to do if the information needed has been collated beforehand. We're also producing a YouTube clip to show people how they can access these services.

In January 2014, after APRA-regulated funds have reported all accounts to the ATO (not just those that have received contributions) we'll be able to display all super accounts online for people to see.

APRA-regulated funds will also report more information about the account, for example if insurance is attached, and whether the account accepts rollovers. We'll use the information in our online services to help people make informed decisions about consolidation.


I mentioned at the beginning that I look forward to working with the superannuation industry in my new role as Deputy Commissioner, Superannuation. Consultation, collaboration and co-design with key stakeholders, and the Australian community at large, are the principles we apply to our day-to-day work at the ATO. These principles help us meet community expectations, making it easier for people to interact with us and to comply with their obligations.

We have a great opportunity with the super reform program to deliver increased efficiency, flexibility, agility, integrity and more real-time interaction for the whole super system, including the SMSF sector.   

We've a shared responsibility to ensure we preserve the retirement savings accumulated in SMSFs and to maintain the integrity of this sector (which continues to grow). Our compliance approaches are aimed at achieving this but we cannot do it alone.

I thank you for your efforts in working with us and I'm confident that we'll continue to work together as we build on our strengths and create the best super system possible. In doing so we are all ultimately contributing to protecting and sustaining the Australian way of life.


1 'Successful experimentation in ATO policy and execution - the importance of stakeholders: nurturing a culture of innovation', address by Alison Lendon, First Assistant Commissioner, Business Solutions, on behalf of Michael D'Ascenzo, Commissioner of Taxation, to the Annual L2I Public Sector Leadership Series event, Sydney, 16 October 2012

2 'Valuation law change', The Morning Bulletin, Queensland, Allan Johnson, 22 January 2013, p 20

3 Practice Statement Law Administration PS LA 2012/4 - Administration of penalties for making false or misleading statements that do not result in shortfall amounts

Tags: Chartered AccountantPersonal taxRetirementSMSFSuper

Author: Alison Lendon, Deputy Commissioner of Super, ATO


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