The ATO has recently published the top 5 mistakes made on SMSF annual returns (SARs) and how they can be avoided when lodging current and future SARs. We share these with you below and provide some of our own commentary around these topics:
Bank account not unique to the SMSF
A fund needs a bank account that is in the name of the fund to manage the SMSF operations, along with accepting contributions, rollovers of super and income from investments.
The account must be separate from any trustees’ individual bank accounts and any related employers’ or advisers’ bank accounts as it will protect the fund’s assets and ensure super payments can be made to the SMSF.
In today’s SMSF world, it is somewhat staggering that the ATO still has problems bank accounts not being unique to a SMSF. SISR 4.09A forms part of the compliance audit each year and requires an auditor to obtain evidence that the fund’s money and assets are held separately from money and assets held personally by the trustees or a standard employer-sponsor.
Providing an incorrect electronic service address (ESA)
An ESA allows an SMSF to receive electronic remittance advice and contributions if it has members receiving super from non-related employers. It consists of alphanumeric characters with a combination of upper and lower case characters and is case sensitive. It’s not an email address or the contact details of the SMSF messaging provider.
ESAs are going to play a growing role in the SMSF sector from 31 March 2021 where SuperStream will be extended to SMSF Rollovers, both incoming and outgoing with APRA regulated funds. As a result, many more SMSFs are going to be required to obtain an ESA, increasing the importance of getting this information right.
Not valuing SMSF’s assets at market value
SMSF assets need to be calculated at market value as at 30 June to prepare the fund’s accounts, statements and SAR. It is a requirement to follow the ATO’s valuation guidelines and when using these principles the regulator will generally accept the valuation provided for by trustees.
Accurate asset valuation is important to ensure your SMSF retains its complying fund status. Penalties may apply for inaccurate valuations as these can have an impact on your members’ balances.
Still problematic for the SMSF sector, becoming even more important from a regulatory viewpoint since the 1 July 2017 super reforms. As indicated by the ATO, inaccurate valuations can pose problems across the payment of income streams, which may prejudice the fund’s ability to claim ECPI and across various investment restrictions, failure to adequately value assets to market value could lead to the Commissioner applying the non-arm’s length income (NALI) rules, taxing the ordinary and statutory income of such assets at 45%.
Trying to lodge with zero assets
An SMSF is not legally established until the fund has assets set aside for the benefit of members. As a result the ATO won’t accept a SAR from an SMSF that has no assets unless the fund is being wound up.
For SMSFs in their first year of lodgement, where it has no assets set aside for the benefit of members, the fund can ask the Regulator to either cancel the fund’s registration or flag the SMSF’s record as Return not necessary (RNN).
It’s the old adage of ‘chicken and the egg, which comes first’ with many practitioners taking the natural ‘next step’ after ordering an SMSF trust deed to complete the TFN/ABN registration and have the fund regulated by the ATO. However, as the indicated above, the SMSF is a ‘trust’ and therefore trust law establishes that a trust is not in existence until it has assets. Conceptually, this becomes more of an issue where newly registered funds occur closer to 30 June. Practitioners need to manage this risk better with their SMSF clients, in particular in setting expectations for establishing the fund.
Lodging a SAR without auditor details
An approved auditor examines a SMSF’s financial statements and assesses the fund’s compliance with super law. An audit must be completed before the SAR can be lodged.
A SAR lodged without auditor’s details, will be suspended and not recognised as a lodgment. This will impact the complying status of the fund until the SAR is lodged with the required information.
Appoint an auditor at least 45 days before the SAR is due, to ensure the audit is completed in time to meet the lodgment date.
A recent development for the ATO following a push by auditors for access to information about the use of their ASIC SMSF auditor registration numbers. The has resulted in the ATO finding a range of cases where the audit has not been completed, creating a compliance issue for trustees and an even bigger problem for the professionals involved. It’s a positive and necessary step to ensure the SMSF sector remains robust with its regulatory compliance obligations.
In today’s SMSF environment, many of these mistakes are overcome through a greater focus of specialisation and with the use of technology available today within the SMSF sector. With a very small component of self-preparers, it will be interesting to understand where these errors are coming from within the sector and address potential problems with levels of competency to ensure that as an industry we keep moving towards a profession.