In recent years the ATO has developed a list of breaches and contraventions that they find constantly taking place within many self managed superannuation funds. These breaches and contraventions are bought about in many cases by Trustees who are not up to date with the operating of their SMSF. When it comes to the audit of the fund it is the auditor who discovers the breaches and contraventions and then in most cases must report it to the ATO by lodging a Contravention report.
What is on the ATO hit list of common errors within SMSF?
A. Income derived from non arms length investments.
Non arms length income in a smsf needs to be declared separately in the tax return of the fund and is taxed at 46.5%, it is not eligible for concessional tax treatment. So how does the fund avoid having non arms length income? Do not have distributions from a discretionary trust to the SMSF. Where commercial property is rented to a related , make sure it is at market rate. Have an independent value report prepared and with a lease that documents the arrangement between parties. Where loans exist between related parties make sure the interest rates are on current commercial terms.
B. Common trustee errors.
Make sure that your ATO trustee declaration is signed within 21 days of funds creation. Make sure you have signed members applications to join the fund and signed consents to act as trustees. Document that the fund has an investment strategy, this should be in writing. As auditors we recommend to our clients that at a minimum they update the Investment Strategy annually. An easy one that many trustees fail to comply with is lodging the tax return by the due date.
C. Exempt current pension income (ECPI).
Where the members of the fund are in accumulation phase and pension phase you must have an Actuarial Certificate to support ECPI. Many funds fail to regularly value the assets of the funds, in particular property in times of falling prices. This tends to have a negative impact on the value of members entitlements within the fund.
Where a transition to retirement pension (TRIS) is in place do not pay out as a pension more than 10% of the members entitlements. Always make sure you document in writing the commencement of the pension. At a minimum there should be a request from the member to commence the pension and acknowledgement by the trustees to pay the pension.
D. Approved Auditors
Recent changes now require that an auditor your SMSF has to be registered with ASIC. If your auditor is not registered with ASIC this raise the attention of the ATO. You should request that your auditor supply his ASIC registration number. For peace of mind you can be assured that SMSF Super Auditors are registered with ASIC and conduct regular professional development to stay current with the changing landscape of superannuation.
DISCLAIMER: The above is general advice only, you should not act on this advice without consulting a professional adviser to discuss your personal circumstances.