3 Self-Managed Superannuation Funds (SMSFs)

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1 3 Self-Managed Superannuation Funds (SMSFs) managed superannuation fund annual return (NAT 71226), together with a single payment for both the supervisory levy and their fund's income tax liability. The single annul return consists of the fund's income tax return, regulatory return and a member contributions statement in respect of each member: see below. The annual return required trustees to answer several specific regulatory questions (often in a Yes or No format) that would flag to the Tax Office potential compliance breaches (eg inhouse assets), depending on how the question is answered. While these questions about the operational status of a SMSF are no longer included in the annual return for and later income years, they still provide a useful compliance checklist. Examples of such questions and the corresponding compliance issue being tested are outlined in the following table. If a fund fails to lodge any of their reporting obligations, it may be subject to a failure to lodge administrative penalty: A corporate trustee of an SMSF was convicted and fined $55,000 in the Downing Centre Local Court in Sydney for failing to comply with court orders to lodge 2 outstanding tax returns. SMSF supervisory levy The SMSF supervisory levy has been increased to $259 from the income year and later income years. The levy is payable to the Tax Office on lodgment of the fund's combined annual return. From , the levy is collected from SMSFs in the same year of income that it is levied. Accordingly, the SMSF supervisory levy is $321 for , $388 for and $259 from The SMSF levy amounts for prior years are listed at. The change in the timing of the collection of the SMSF levy is being phased in over the 2 years and For , SMSFs are required to pay the levy and half of the levy, ie a total of $321 for Likewise, in SMSFs are required to pay the remaining half of the levy and the levy, ie a total of $388 for From the income year, SMSFs will pay the levy during each income year, ie a total of $259 per annum. For the first income year in which an SMSF elects to be regulated, the SMSF supervisory levy is due and payable on the return lodgment day for that income year. This means that when an SMSF lodges its first annual return from , it will pay the levy for the first and second income years (ie a total of $518). Example SMSF supervisory levy for first year funds JKL SMSF is regulated from 10 August The fund's return lodgment day is 28 February following the end of the income year. JKL SMSF will therefore pay $518 on 28 February 2018 when it lodges its first return (ie $259 for the income year ending on 30 June 2017, plus $259 for the income year ending on 30 June 2018). Source: Explanatory Statement Superannuation (Self Managed Superannuation Funds) Supervisory Levy Imposition Amendment Regulation 2013 (No 1)

2 SMSF annual return changes for Each year the Tax Office revises the SMSF annual return (Nat 71226) to collect more targeted information for use in its tax administration systems and compliance program. Some of the key changes for the 2014 SMSF annual return include: Rollover reporting has been simplified so that the superannuation fund that receives a contribution during a financial year is always the fund with the obligation to report the contribution to the Tax Office, even if it has been rolled out or paid to a member before the end of that year. SMSF trustees should report in sections F and G of annual return 2014 all members and former members who held a superannuation interest in the fund during the year (including any members who have rolled out during the year) and all contributions received for those members and former members before a rollover or other benefit payment occurred. The changes made the 2014 SMSF annual return to allow this to happen include Label P (renamed Inward rollovers and transfers ) and Label Q (now Outward rollovers and transfers ). Rolled in contributions are no longer reported at contribution labels A to M. Limited recourse borrowing arrangements (LRBAs) for Section H: Assets and liabilities of the 2014 annual return show at Label J1 to J6 the value of all assets held in trusts as security for loans under LRBAs: see. Show at Label J the sum of all values shown at J1 to J6. Show at Label V Borrowings (item 16) the value of outstanding borrowings under the SMSF's LRBAs. Do not report again values included in Label J1 to J6 at any other asset label in Section H. An instalment warrant is a LRBA (show it at the appropriate Label J1 to J6). Do not include derivatives at Label J1 to J6. Show them at O (Other assets). Example Reporting LRBAs in annual return If a residential real property worth $200,000 is held in a trust as security for a loan of $100,000 under a LRBA, the Tax Office says the SMSF should report $200,000 at Label J1 (Australian residential real property). The value of the loan ($100,000) is included at Label V Borrowings (item 16). Note that the Tax Office described insmsf News edition 26 how to report LRBAs at additional labels on the 2013 SMSF annual return. SMSF annual return changes for For , the SMSF annual return (Nat 71226) revealed some subtle changes such as a new field for the SMSF auditor number. From 31 January 2013, approved auditors of SMSFs are required to register with the ASIC and are issued with an SMSF auditor number: see. The Tax Office says the SMSF auditor number field should be left blank if the approved auditor is not registered with ASIC. However, the approved auditor s membership number and professional body code must be completed. Other key changes for included: Fund benefit structure addition of a new code in Section A; Exempt current pension income Label Y (ECPI) has been inserted into Section B (Income) and replaced Label K which was previously recorded in Section C (Deductions). The gross income of

3 an SMSF derived from assets held to provide for current pension liabilities is shown as part of the total shown in Labels A to U. To ensure this exempt income is not taxed, it is necessary to deduct an identical amount at Y. The Tax Office says that the exempt income shown at Y should not be reduced by the amount of expenses incurred in deriving that income. The Tax Office also notes that any expenses incurred in gaining or producing ECPI are not deductible, and those expenses should not be shown anywhere at item 11 (Deductions) on the annual return; Member information trustees need to report all current members with an interest in the fund at 30 June (section F), and deceased members and all former members who held an interest in the fund at any time during the income year (section G). Constraint boxes have been increased to 10; renamed label G (Other third party contributions); new label T (Contributions from noncomplying funds and previously non-complying funds); renamed label P (Inward amounts less any rolled in contributions reported at A M); renamed Label Q (Outward amounts less any rolled out contributions at item 15K on RBS); Australian direct investments (Item 14b) label J (descriptor changed to Limited recourse borrowing arrangements); label M (descriptor changed to Collectables and personal use assets); Regulatory information new label P (Did the SMSF acquire any exempt assets from related parties?) Certain exempt assets may be acquired at market value from a related party (eg listed securities, business real property, certain in-house assets and family law assets). Take care to substantiate that the acquisition was at market value and qualifies as an exempt asset under ss 66(2)-(2B): see. Note that the proposal to require related party acquisitions and disposals of certain assets to be supported by a valuation from a qualified independent valuer from 1 July 2013 was deleted from the Tax and Superannuation Laws Amendment (2013 Measures No 1) Bill Nevertheless, the Tax Office is expected to scrutinise related party transactions to ensure that the market value is justified: see. Calculation statement modified for tax offset priority rules contained in the income tax law. The changes are designed to improve the calculation statement by more clearly articulating the ordering of the tax offsets and when they can be claimed. Management and administration expenses have been split into 2 separate items. Common errors in SMSF annual returns The Tax Office has highlighted the following common errors and issues in SMSF annual returns: Regulatory questions Incorrect responses to the Yes or No regulatory questions for and earlier returns (see above) may result in delays in processing returns, unnecessary contact from the Tax Office or penalties in some cases. The Tax Office suspects that a proportion of trustees had started answering No to the list of questions and continued to respond in the same way down the column. However, answering No to either questions G (arm's length investments) or M (ownership of assets) is an indicator of a possible regulatory breach.

4 Incorrect member TFNs Use of the fund's TFN or the tax agent number instead of the members' TFNs in sections F and G of the return. Incorrect member TFNs delay processing returns which may affect SMSF refunds or co-contribution payments. Contributions reporting Personal contributions (notified by the member to the fund that they intended to claim as a tax deduction) reported as employer contributions (and sometimes the taxpayer not reporting the income tax deduction at the correct label in their individual return). Also re-reporting of contributions to correct an error immediately after notification of a potential ECT liability suggests that the re-reporting is aimed at reducing the liability. Assets and liabilities Reporting assets and liabilities that do not balance with member entitlements. The Tax Office says it will contact trustees if asset and liability figures for the SMSF do not balance. Member transactions All member transactions which impact on an SMSF's financial position must be reported in sections F and G (member information). All contributions and expenditure must be recorded to enable accurate calculations. Adjustments to a member's account including increases and decreases in asset values and income tax expenses should be recorded at label O. Approved auditor details are accurately completed (a return cannot be lodged before the annual audit has been completed). Approved auditor expense auditor fees should be reported at the new deduction label for approved auditor expenses (and not under the Management and Administration expenses label). Investment and management expenses Expenses incurred from derived investment income (eg ongoing fees paid to external investment advisors for the management of investments) should generally be reported at the Investment Expense label (and not as Management and Administration expenses) in section C item 11 in the annual return. The cost base of an asset is not deductible as an investment expense. From , management expenses and administration expenses have been split into 2 separate items. Tax-related expenses should be claimed at the Other Deductions label. Tax-related expenses include fees paid to a registered tax agent for the preparation of the SMSF annual return and the supervisory levy. Roll-overs amounts rolled over into an SMSF from another fund must be reported in the return and should match the Roll-over benefits statement (NAT 70945) supplied by the previous fund. Note that a new Rollover Benefit Statement (RBS) form applies from 1 July Zero assets the Tax Office will not process an SMSF annual return if there are no assets in the fund. Likewise, a new SMSF must to hold assets before it can be registered: see. Only SMSFs which have been wound up and are lodging their final annual return can report zero assets. Trustees of SMSFs which cease to hold any assets are also required to notify the Tax Office that the fund has been wound up: see.

5 Deceased members Contributions received from an individual before they died must be reported at labels A to M of sections F and G. All earnings, losses, taxes and expenses that affect the final balance of the deceased member's account are reported at label O. Any payments in respect of deceased members must be reported at label R using code L (lump sum), regardless of whether the final payment is in the form of a reversionary pension or a lump sum. Member information from trustees need to report all current members with an interest in the fund at 30 June (section F), and deceased members and all former members who held an interest in the fund at any time during the income year (section G). Special income Non-arm's length income (see ) should be reported in section B item 10 label U. Only deductions that relate to the non-arm's length component of income can reduce the amount of income reported at label U. Exempt pension income Before a fund starts paying a pension, all of its assets need to be re-valued at market value. Tax losses are offset against exempt current pension income first, while any remaining tax losses can be offset against assessable income. Trustees must report all income earned during the financial year, even if the fund is in 100% pension phase. Funds cannot claim a deduction for expenses relating to pension assets as the income is non-assessable: see. If the fund has both assessable and non-assessable income the expenses should be apportioned. SMSFs using the proportional method to claim ECPI must obtain an actuarial certificate before they lodge their annual return. Minimum pension payments where a trustee fails to pay the minimum pension amount for an income year, the Commissioner will exercise his general powers of administration to treat the superannuation income stream as continuing for ECPI purposes from 1 July Provided that all of the conditions specified by the Commissioner are satisfied, a trustee can self-assess this concession: see. Income streams and death the Government has amended the law from 1 July 2012 to allow the tax exemption (ECPI) for fund earnings on investments supporting superannuation income streams to continue following the death of a member, provided that the death benefit is paid as soon as possible: see. Anti-detriment deduction while SMSFs can claim a deduction for anti-detriment payments (see ), such a payment must be permitted under the SMSF s trust deed and claimed in the year the lump sum death benefit is paid. Winding up ensure question 9 (Was the fund wound up during the income year?) is completed correctly. If answering no, no further information is required at question 9. See also the Tax Office's SMSF annual return instructions (NAT 71606). Further information is available on the Tax Office Website, Completing the self-managed super fund annual return. Contribution reporting requirements From 1 July 2007, the superannuation reporting obligations for superannuation trustees are consolidated into Div 390 of Sch 1 to the Taxation

6 Administration Act 1953 (TAA). Superannuation funds are required to report to the Commissioner details of contributions and roll-over superannuation benefits. Broadly, the information collected by the Commissioner in contribution statements is utilised for the purposes of administering: the co-contribution regime: see ; superannuation guarantee obligations: see ; and excess contributions limits: see. PAYG and payment summary reporting obligations in relation to payments of superannuation lump sums and employment termination payments are also set out at. Penalties for failing to comply with the superannuation reporting requirements are set out in Div 390 of Sch 1 to the TAA: see. Contributions statements A contributions statement must be provided to the Commissioner in the approved form in respect of individuals who were fund members at the end of the specified period (to be determined by the Commissioner). An SMSF may also be required to supply a statement to the effect that no contributions were made in respect of a member during the period. The approved form may require the statement to contain, among other things, the member's TFN (where known), details of contributions made or paid in respect of a member, including the amount and type of the contributions. The SMSF annual return (NAT 71226) incorporates the member contribution statement details and satisfies this reporting requirement. All personal contributions should be reported at the Personal contributions label in the SMSF annual return, even if the member provides a notice of intent to claim a deduction for the contribution: see. From 1 July 2013, trustees need to report all contributions received during a financial year in the SMSF annual return, even if some of those contributions are rolled out to another fund before the end of the financial year. From 1 July 2014, trustees of all superannuation funds (including SMSFs) must receive contributions from medium and large employers in accordance with SuperStream data and payment regulations and standards: see. Trustees of SMSFs may need to re-lodge their annual return if any TFNs for fund members do not match those in the Tax Office's systems. If the Commissioner cannot determine the correct TFN, he will ask the trustee to find out the correct TFN and report it by re-lodging the SMSF annual return within 60 days. Roll-overs between superannuation funds Where a superannuation fund rolls over a superannuation benefit, the paying fund does not have to provide a contribution statement to the Commissioner but is required to report to the receiving fund within 30 days in respect of the amounts rolled over: see. The statement may require details of the value of the superannuation benefit transferred, the tax-free component, the taxable component, the element taxed in the fund and the element untaxed in the fund. The receiving fund is required to report the amounts in a contributions statement. From 1 July 2013, trustees of

7 superannuation funds are required to comply with the SuperStream rules when paying roll-over superannuation benefits between 2 superannuation funds and reporting to the Tax Office: see. The Tax Office expects that SMSFs will need to use its SuperStream Standard for payments and receipt of rollovers from 1 July Release authority statements A superannuation fund that has acted in accordance with a release authority (see ) must supply the Commissioner with a statement in the approved form within 30 days of the amount being paid from the member's account. The fund must also give the individual to whom the release authority relates a copy of the statement within 30 days after the amount is paid. Notifying Commissioner of changes in information The trustee of an SMSF must notify the Commissioner of any change in the fund's name, address or details of the fund's contact person and also of any change in the membership of the SMSF, the trustees of the fund or the directors of the fund's corporate trustee: SIS reg 11.07AA. The Commissioner must be notified in the approved form within 28 days after the occurrence of the change.