SMSF Compliance Risks – Key Risk Areas for the New Financial Year

SMSF Compliance Risks

2017/18 is a hectic year for SMSF professionals. The super reform from 1 July 2017 has had a profound impact on our super and tax systems. New terminologies were introduced, new scenarios were created, and new questions were raised for further legislative amendments. In the 2017/18 financial year, we calculated transfer balances, lodged TBAR, dealt with CGT relief, advised contributions under the new rules, and reconsidered death benefit implications.

In the 2018/19 financial year, we will mainly continue with the implementation of the 2016 budget measures. This article discusses the compliance focal points in the new financial year and highlights possible risk areas.

TBAR time frame

By 1 July 2018, transfer balances for retirement phase pensions in place at 30 June 2017 should have been reported. From 1 July 2018, we will report current year events and 2017/18 events.

Basically, reportable events are those that affect a member’s pension capital amount. Common events are: pre-existing retirement phase pensions at 30 June 2017, new retirement phase pensions starting from 1 July 2017, TRISs entering retirement phase, and commutations. However, the reporting due dates will require multi-colour highlighters in the calendar.

For 2018/19 events:

Where all members have a total superannuation balance (TSB) of less than $1 million, the fund can report in its annual return. Where at least one member has a TSB of $1 million or more, all events for all members are reported within 28 days after the end of the quarter in which the event occurs. $1 million is measured at 30 June 2018.

Once the reporting frame is set, it continues throughout the whole year.

For 2017/18 events:

Where all members have a TSB of less than $1 million, the fund can report in its annual return. Where at least one member has a TSB of $1 million or more, all events for all members are reported before 28 October 2018. $1 million is measured at 30 June 2017 where there is a pre-existing retirement phase pension or when the first member starts the first retirement phase pension during 2017/18.

Events that must be reported sooner:

For excess transfer balance determination issued to the member, commutation must be reported within 10 business days after the end of the month in which the commutation occurs.

When a member with excess transfer balance does not respond to the determination, commutation authority will be issued to the trustees. When a commutation authority is issued to the trustees, responses must be reported within 60 days of the date the commutation authority was issued.

Events that are encouraged to be reported sooner:

For example, it’s better to report rollovers at the time they occur to avoid a double-counting.

Non-arm’s length expenditure would result in NALI

Draft legislation has been released to close the gap in all possible non-arm’s length dealings. Non-arm’s length income in section 295.550 ITAA 1997 is extended to capture any scheme where “the entity incurs a loss, outgoing or expenditure” less than arm’s length dealings, whether it is of a capital nature or not. If enacted, the new NALI provisions would apply to income derived from 2018/19 regardless of when the scheme was entered into.

This is consistent with the ATO’s safe harbour guidelines for LRBAs, but broader. If a fund acquires a commercial property from a related party for less than the market value, the net rental income would be NALI and the net capital gain (when the super fund disposes the asset) would be NALI.

NALI is one of the worst things that could happen to a super fund, a fund should steer clear of anything that smells like NALI. Once NALI is established, it is taxed at 45%. NALI is the whole amount of income under the scheme, not just the extra bit of income generated above the non-arm’s length dealings. NALI applies even if the fund is in pension phase.

LRBAs

Under the proposed law for LRBAs entered into on or after 1 July 2018, the outstanding loan amount is added to a member’s total superannuation balance (TSB) when the member has satisfied a condition of release with a nil cashing restriction or the loan is with a related party.

This new measure is intended to prevent the following arrangement: A member, who has met a condition of release, withdraws money to bring his total TSB below $1.6 million. He then lends money back to the SMSF under an LRBA. Because he’s created room in his TSB, he can then make non-concessional contributions of up to $300,000 in a year.

This measure will not affect contracts entered prior to 1 July 2018. And it does not affect those whose TSB is already above $1.6 million.

Downsizer contributions

Members 65 years or older might be eligible to make downsizer contributions of up to $300,000 per person from proceeds of selling their home where the exchange of contract occurs on or after 1 July 2018. The $300,000 is not counted towards any normal contribution caps and is not restricted by the TSB.

65 or older is measured at the time of making the contribution. The contribution must be made within 90 days of receiving the sale proceeds. Extension of time may be granted, however the ATO has put up an example where the extension in excess of 90 days is not granted for a member who requires more than 90 days to turn 65.

Eligible property must be in Australia and owned by the member or their spouse for 10 years or more prior to the sale. Houseboat, caravan or other mobile home are not eligible. The capital gain from the sale must qualify for main residence exemption in part or in whole. Pre-CGT assets need to pass main residence exemption tests as well. This contribution can only be made for one home.

Carry-forward concessional contributions

From 1 July 2018, members will be able to make carry-forward concessional contributions if they have a TSB of less than $500,000, however the catch-up payment will only start from 2019/20 financial year.

Finally, for tax agents and auditors whose work is in arrears, from 1 July 2018, we need to be aware of some changes in 2017/18 which affect our work in 2018/19.

  1. When claiming ECPI, an actuarial certificate is required for the period in which the fund is unsegregated. Previously, the industry practice was to obtain an actuarial certificate for the entire financial year, which is no longer correct for the 2017/18 lodgment.
  2. 10% test is abolished for personal concessional contributions in the 2017/18 year. Make sure the notice of intent to claim deduction form received by the fund is valid. Criteria are covered in section 290.170(2) ITAA 1997.
  3. Tax deduction for depreciation of second-hand assets in residential property is no longer allowed. The cost will form part of the cost base. This change applies to new contracts entered at or after 7.30pm (AEST) 9 May 2017. The change applies from 1 July 2017. Refer to section 40.27 ITAA 1997.
  4. Travel expense for residential property is disallowed from 1 July 2017 and will not form part of the cost base.
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