Current compliance issues in the SMSF space
The SMSF space has always been a complex area for trustees, beneficiaries, and advisers. In the past few years, the ATO has made many concessions and has put compliance action on hold because of COVID-19 and its after effects. However, for the 2022-23 year and beyond, the ATO is looking to scale up its compliance program as a reaction to indicators of heightened risk in the sector. One specific area it will be targeting is those failing to lodge annual returns, which has been identified as a red flag leading to illegal early release.
Recent ATO statistics
In a recent presentation, the Director of ATO’s superannuation and employer obligations area, Paul Delahunty, shared:
- some key compliance issues that the ATO is currently prioritising in the SMSF space;
- some identifiable compliance trends to emerge from audit contravention reports; and
- some key statistics on the overall SMSF population and details on asset classes.
Recent statistics indicate that there are around 600,000 SMSFs, with over 1.1m members holding an estimated total asset value of $876 billion. By far the most popular investment class by dollar value is listed shares ($241 billion invested by SMSFs), which is almost double the amount invested in the second asset class of cash and term deposits ($147 billion). These investments are then followed in descending monetary value by unlisted trusts ($115 billion), non-residential property ($91 billion), and residential property ($49 billion).
ATO scaling up compliance after reprieve
During COVID-19 and until recently, the ATO had put compliance action in the SMSF sector on hold and provided various forms of relief, including the in-house asset rules for rental relief provided to related party tenants.
However, in the 2022-23 financial year, the ATO is looking to scale up its compliance program as a reaction to indicators of heightened risk.
Illegal early release
While the ATO’s main compliance focus will always be on any activity that puts retirement savings at risk or inappropriately takes advantage of the concessional tax environment, in the near term it will be directing its compliance focus specifically at illegal early release in all its forms. Illegal early release occurs when individuals access their retirement savings before a condition of release has been met. According to the ATO, illegal early release is on the rise.
The three main routes for illegal early access according to the ATO are:
- new registrants entering the SMSF space purely for the purpose of illegal early access;
- existing trustees of SMSFs no longer lodging SMSF returns after illegal early access; and
- existing trustees that continue to lodge but have illegally accessed some of their super.
One of the big red flags that the ATO looks out for is when individuals establish their SMSF and initiate a rollover but fail to lodge a corresponding first annual return. The ATO notes that this is a good predictor that an illegal early release has occurred, either as a result of deliberate behaviour or participation in a scheme.
Data obtained from lodgment of 2020 annual returns showed a significant growth in the number of SMSFs failing to lodge their first annual return which accounted for 26% of all returns. Even more concerning for the ATO, early data from the 2021 year seems to indicate that the percentage of outstanding returns for new registrants has increased yet again. To put this in context, the percentage of new registrants failing to lodge their first return was only 3% in 2013.
Compliance campaign
New registrants that ignore the extensive ATO communications campaigns to lodge will now be targeted with a “3 strikes and you’re out” compliance campaign. This campaign consists of the ATO firstly issuing a “blue letter” that encourages trustees to take immediate action to lodge and provides a pathway for those who need support. If no response is received to the “blue letter”, the ATO will follow up by issuing an “amber letter” warning trustees of the consequences of failing to lodge their return.
Finally, if no response is received as a result of the “amber letter”, a final warning or “red letter” will be issued advising trustees that the ATO have commenced the disqualification process and will consider other enforcement action. So far, the ATO has issued its first and second batch of “red letters” to funds in early April and June 2022, with no doubt more to follow.
Need help with lodging your annual return?
If you have recently become a trustee of an SMSF and are having issues with lodging the fund’s annual return, seek professional advice and assistance to avoid any future compliance action.
Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.