ATO collaborates with SMSFs on compliance
The Australian Taxation Office (ATO) has reviewed the approach it takes to self-managed super fund (SMSF) compliance, and it is important trustees understand this change and how it affects them. The new stance is good news for SMSFs and should help them better appreciate their obligations and stay within the law.
In the past, funds identified as high risk for non-compliance would undergo a thorough audit by the ATO, explains Eleanor Tjondro, solicitor with Townsends Business and Corporate Lawyers.
But in the past year the tax office has taken a more collaborative approach in relation to the issue of trustee compliance.
“Greater emphasis will now be placed on supporting those trustees who approach the ATO with potential non-compliance issues. On the other hand, more severe enforcement action will be employed for those deliberately choosing not to co-operate with the ATO,” Tjondro explains.
This altered stance was summarised in an address given by Kasey MacFarlane the Assistant Commissioner at the ATO to the Tax Institute in August 2016. During the address the ATO indicated it would be issuing Practical Compliance Guidelines for specific superannuation transactions.
“These are materials that set out the terms of a particular transaction that the ATO has indicated SMSFs need to meet. Doing so will ensure that trustees stay within their regulatory obligations,” Tjondro adds.
One guideline that has already been published is PCG 2016/5
, which discusses non-arm's length limited recourse borrowing arrangements (LRBAs).
It is expected further guidelines will be published in relation to other transactions, such as pension underpayments, down the track.
PCG 2016/5: recent amendments
The non-compulsory PCG 2016/5
was first published in early 2016 and outlined the terms on which a related party loan undertaken by an SMSF would avoid the risk of coming under the non-arm’s length income provisions in superannuation law.
There are strict and onerous rules around how SMSFs and other super funds can go about related party loans. SMSFs who breach these rules risk serious fines for non-compliance and may also have to undertake additional education to demonstrate to the tax office they understand their obligations around the way their fund is run.
A new approach
As Tjondo explains, PCG 2015/6
is not mandatory. Rather it includes ‘safe harbour’ guidelines. This approach was taken because if trustees choose to vary the terms of their existing related party loan, or enter into a related party loan that mirrors these guidelines, they have assurance the ATO won’t apply the non-arm’s length provisions to their transaction.
In late 2016 the ATO updated these guidelines, extending the deadline for compliance to 31 January 2017. At the same time the tax office incorporated the Taxation Determination TD 2016/16
into PCG 2015/6
, which deals with tax in relation to PCG 2015/6
PCG 2015/6 lists related party loan terms described by the ATO to be at non-arm’s length terms. One such example is a high loan to value ratio (LVR). The ATO prescribes a maximum 70% LVR. As long as the SMSF ensures LVRs of its loans are under this amount it should remain within the ATO’s non-arms length guidelines.
Tjondo says these practical compliance guidelines have a positive impact on trustees as they give them certainty their transaction falls within their compliance obligations.
Issuing these guidelines also allows the ATO to focus on SMSFs with a higher degree of non-compliance and employ more serious enforcement action where appropriate. This is under the expectation trustees will approach the ATO for assistance with compliance issues.
“There has been significant interest in this guideline and many clients have requested assistance in adjusting their existing related party loan to mirror the guideline’s terms. For clients currently entering into a related party loan, we also see that most wish to adhere to the terms, indicating this new approach of the ATO has initially been well received,” she adds.
Assistance for trustees
It is hoped the ATO’s emerging approach to SMSF compliance will help more funds to stay within regulations. It also acknowledges setting up an SMSF can be quite daunting, especially since the responsibility for ensuring compliance with superannuation laws rests with the trustees of the fund.
Expect the ATO to issue further Practical Compliance Guidelines in the near future. Go to the ATO’s web site
for more information.