How to prepare for an ATO audit
Since 1 July 2014, the Australian Taxation Office (ATO) has had enhanced powers to penalise SMSF trustees whose funds are found to breach regulations that relate to these structures.
However, the ATO is transparent about its approach to compliance, and is focused on giving trustees all the right information to ensure their fund does meet legal requirements.
In a speech to the Chartered Accountants Australia and New Zealand (CAANZ) SMSF conference in September last year, Kasey Macfarlane, the ATO’s Assistant Commissioner, SMSF Segment, Superannuation, confirmed the tax office’s mindset is to help trustees to comply with their obligations.
“We focus primarily on awareness, education and support for trustees attempting to do the right thing. Obviously some trustees make mistakes or struggle to comply and therefore the annual independent audit of SMSFs is a key integrity check,” Macfarlane said.
“Accordingly we review and consider action on all reported contraventions. By taking action against those who repeatedly have difficulty complying and those who intentionally fail to comply, our audits and reviews ensure a level playing field,” she explained.
How does the ATO identify breaches?
The main tool the ATO has to identify funds that are non-compliant is a risk model that considers 40 different attributes. These include income tax and the regulatory history of the SMSF, as well as the annual return and auditor contravention report.
If the ATO determines there is a strong possibility of an SMSF being in breach of regulations, it is likely it will draw on its enforcement powers.
What action can the ATO take to address non-compliant funds?
There are three compliance tools the ATO can use to address regulatory contraventions by an SMSF. If the breach occurred due to trustees’ lack of understanding of certain rules, the ATO can require them to undertake an ATO-approved education course, and provide evidence to the ATO the course has been completed. The ATO can direct the trustees to rectify a contravention, and provide evidence of this to the ATO. If a trustee does not rectify the breach, the ATO can apply a financial penalty.
Macfarlane told the conference that, “the best way to avoid the more serious outcomes is firstly to ensure you are compliant, and secondly if you do identify a failure take early action. Engage with us, work with professionals, for example the SMSF auditor, to rectify and put processes in place to ensure future compliance.”
The ATO has published a list of issues on its radar for the 2015/16 financial year, which are as follows:
- “Individuals who enter the sector with poor personal taxation lodgement histories and no or limited income.
- SMSFs with overdue annual returns.
- Breaches reported in auditor contravention reports that have not been rectified.
- SMSFs that have significant changes in assets and income, outside the previous pattern of the fund and without obvious reason.
- Possible non-commercial related-party investments or transactions.
- Non-compliance with pension rules.
- Inappropriately claimed tax deductions when a fund is in pension phase.”
Top tips for SMSF trustees
Greg Einfeld, a director of specialist SMSF advice firm Lime Super, has some advice for SMSFs trustees to reduce the risk of an ATO audit.
“There are some simple steps to take with any SMSF that will mean you are more likely to stay on the right side of the regulator. These include keeping minutes and records, lodging your annual returns on time, keeping your SMSF assets separate from your personal assets and investing in line with the superannuation rules. If in doubt, it is always prudent to seek advice before entering into a transaction,” he says.
Einfeld notes that while the audit could cover any aspect of the SMSF’s operations, the most common area targeted by the ATO is early release; that is, taking money out of a fund before the members are entitled to do so. “The ATO also has a strong interest in related party transactions,” he confirms.
While some audits are random, in other cases the ATO can target a particular fund, and it is important to respond in the right way.
The best way to avoid an audit is to ensure your fund always stays inside the rules. But if your fund is audited by the ATO then you should seek advice from an accountant, financial adviser or lawyer who specialises in SMSFs to ensure you provide the right information and respond to the ATO’s questions correctly.