How to avoid the ATO's attention

It seems, based upon a speech recently given by an Assistant Commissioner, that the best way to minimise the risk that the ATO will take an interest in your SMSF is not to be known to the ATO and to lodge all SMSF annual returns on time and with clean (ie unqualified) audit reports.

When an SMSF is first established
When an SMSF is first registered with the ATO (registration cannot be avoided as it is a precondition for favourable taxation treatment), the ATO will review the compliance history of the individuals associated with the SMSF (either as members or as trustees), their initial superannuation balance and whether they are in receipt of Commonwealth benefits (such as the age pension, new start allowance).  

While the ATO will not attempt to contact every individual associated with a new SMSF, they will try to make telephone contact with one or more individuals associated with the SMSF.  Presumably this is done to test whether the SMSF is bona fide and not being used as a vehicle for early release of super benefits.

What should individuals do?
If you have previously had attention from the ATO in relation to your own tax affairs or the tax affairs of another SMSF, it is highly likely that you will have a high profile with the ATO and you can expect some contact to be made by the ATO.  It would be best not to avoid this contact (by not responding to telephone enquiries) and be prepared to answer some basic questions about SMSFs such as when can you access you super benefits and what is your role as a trustee/director of the SMSF.  SUPERCentral is currently preparing a simple FAQ and guide for new SMSF trustees which may assist in responding to any ATO enquiries.  The FAQ and Guide will soon be available.

What should an SMSF adviser do?
As an adviser you should undertake a three step process:  First step – to determine whether the client is eligible to participate in an SMSF; second step – to determine whether your client can “handle” an SMSF and the last step – whether your client is likely to be a person of interest to the ATO.

The first step is the formal process of determining whether the client is eligible to participate in an SMSF.  More correctly, whether your client is disqualified from participating.  The most likely reason for disqualification is because the individual is an undischarged bankrupt or has as a debtor entered into a personal insolvency agreement.  Less common reasons are because the individual has been convicted of an offence in respect of dishonest conduct or been disqualified by APRA or the ATO.  If a company is to act as a trustee, then, in addition to the above, the individual must not be disqualified from being a director.

The second step is to determine whether the individual can handle the role of being a director or trustee of an SMSF.  This involves determining whether your client knows the basics of SMSFs, understands that the SMSF must be properly invested, understands that the SMSF must be audited and annual returns lodged when due.  While the individual need not personally perform all the roles (and can engage SMSF professionals) they will nevertheless remain responsible for the due performance of those roles.

The final step is to determine whether the new trustee/director is likely to be a person of interest to the ATO.  This can be done by reviewing their tax lodgement history – whether their own returns have been lodged on time, whether there have been any ATO initiated debit amendments and whether they have been involved in any audits which gave rise to an adverse result.  If they have been previously involved in SMSFs, whether the annual fund returns have been lodged on time, whether there have been any qualified audit reports, unauthorised benefit releases and whether any enforcement action had been taken against them or the SMSF.  

While being a person of interest to the ATO does not automatically disqualify an individual from participating in an SMSF, there is a real and genuine risk that the ATO may take a particular interest in the SMSF and could (in the worst case) decline to include the SMSF on the Super Fund look up website (which will prevent employer contributions and rollovers being made to the SMSF).  The SMSF adviser must bring this risk to the attention of their client and, if the risk can be mitigated, address the risk by ensuring that the client is in a position to respond to any ATO enquiries.  However, in the extreme case (where the individual has been involved in an SMSF which has been made non-complying by reason of breach of the SIS Act and Regulations or involved in illegal early release schemes), this may not be possible.

When the SMSF is operating
While an SMSF is operating, the principal triggers for greater ATO interest in the SMSF are failing to lodge annual returns (or late lodging annual returns), having qualified audit reports and being subject to significant or frequent auditor contravention reports.
The best solutions are, of course, to lodge annual returns on time and to not undertake any activity (or inactivity) which will cause the auditor to qualify their audit report or to issue an auditor contravention report.
If a contravention has occurred, then timely rectification of the contravention must be undertaken and, if possible, the auditor contravention should be noted that the contravention has been rectified.