The ATO has been clear about what to anticipate in 2020 as Kellie Grant, ATO Director of SMSF Auditors Portfolio recently gave these key insights as to the ATO focus for the year ahead:
More SMSFs, more Contraventions
The number of SMSFs grew almost 20% over the last financial year, from 8,215 in FY 2018 to 10,330 in FY 2019 while the number of regulatory contraventions grew by over 60% from 16,909 to 27,719, according to the ATO.
The most common contraventions are:
in-house assets (18.5%)
separation of assets (12.7%)
More than 50% of these self-rectified.
So what are the enforcement actions? There are two pathways for trustees... if trustees can get back on track they are directed to rectify, educate or give an enforceable undertaking. If they are not able to get back on track, they may be disqualified as trustees and/or issued with a notice of non-compliance. Penalties can be given under both pathways.
How do we know if a trustee has been disqualified? It is important that advisors and auditors can readily identify when a trustee has been disqualified. The ATO is collating a register of disqualified trustees that can be accessed on the ATO website.
Focus Areas for 2020
The ATO says that their current compliance risk focus areas are:
Illegal early release (IER)
Top 100 SMSFs and tax planning
Top 100 auditors
High risk auditors
SMSF Auditor Number (SAN) misuse
Trustee Education Education is a key area of focus for 2020 with the ATO aiming to "promote trust and confidence and willing participation." Looking forward, the ATO wants trustees to be better informed about their role and obligations and is encouraging a proactive approach to trustee education. Some education tools and strategies include:
Formal advice and guidance products
Subscription to ATO SMSF pages and newsletters
The ATO is also considering the introduction of mandatory training for trustees.
Auditing of Auditors To give assurance that auditors are providing adequate and independent audits, the ATO has begun a program of reviewing the top 100 Auditors. 51 of the top 100 have been audited already, with two being referred to ASIC. There will be a continued emphasis on genuinely independent audit arrangements and on providing quality audits.
The ATO use data holdings, information from case reviews and TP intelligence to identify auditors with:
poor or outdated knowledge and audit skills
poor processes or systems
a lack of competence
intentional failure to comply
high volume, low ACR ratios and high volume low cost audits
potential independence breaches
The ATO is absolutely committed to ensure competence in the audit sector to protect members' retirement savings. Since 2013, 865 high risk auditors have been reviewed.
SMSF Auditor Number (SAN) Mis-use The ATO found 1,445 instances of SAN misuse to investigate connected to 626 different tax agents. While 85% were found to be inadvertent errors, 15% were deliberate SAN misuse. As a result, five tax agents were referred to the Tax Practitioners' Board in FY 2019.
We can expect even greater vigilance on this front in 2020 as the ATO is now conducting annual mail-outs to notify auditors of the funds that have quoted their SAN so they can cross check for deliberate misuse.
Top 100 SMSFs and Tax Planning The ATO has profiled the top 100 SMSFs, which represent a total of $8.3b of assets. The ATO says that 35% of these SMSFs warrant review of:
use of LRBAs
rapid and excessive asset growth rates
on arm's length arrangements
previously identified risks.
Transfer Balance Cap Compliance With regard to transfer balance cap compliance, the ATO has found:
high level re-reporting post issuance of determinations and commutation authorities
53% of commutation authorities issued have been revoked due to re-reporting
86% of SMSFs reporting a capped defined benefit income stream in
FY2018 seem to have failed their withholding obligations.
Remember that since 1 July 2017 SMSFs have PAYG withholding obligations for capped defined benefit income streams paid to a member over 60 or under 60 where the income stream is a death benefit where the deceased was over 60 at the time of death. Even if the amount withheld is nil, the SMSF must provide the member and the ATO with pension payment summary information.
Overdue SMSF Annual Returns From 1 October 2019, if an SMSF is > 2 weeks overdue on any annual return lodgement due date, the ATO will change their status on Super Fund Lookup to 'Regulation details removed'. To avoid status changing to 'Regulation details removed' trustees should seek a deferral to lodge SMSF annual returns before the due date. This will ensure that their SMSF status remains 'complying'.
Do you need to review your SMSF audit arrangements for 2020?
SaulSMSF offers a quality solution that is 100% Australian and genuinely independent. We maintain and respect the relationship that accounting firms have with their SMSF client. Protect your relationships with your valued SMSF clients by doing the right thing.
If you'd like more information, please contact Saul SMSF.