Income Tax Problems in SMSFs

Misreporting in SMSF income tax returns is a major problem.  This is one of the conclusions drawn from a review of the 2006/07 and 2007/08 SMSF compliance programme conducted by the ATO.

The ATO is responding by increasing its SMSF income tax communication and compliance work, and also by improving its data collection and analysis.

The ATO estimates that it will complete 1,700 SMSF compliance cases for 2008/09 (compared with 940 cases for 2007/08) and those cases will cover:

• 600 cases focusing on exempt current pension income
• 300 cases declaring special income; and
• 800 cases to verify various types of deductions which have been claimed.

Presumably, the concern with the first type of case is whether the SMSF has obtained the appropriate actuarial certificate (to apportion the income of the fund between current pension liabilities and other benefit liabilities) and whether assets which have been claimed to be segregated current pension assets have been validity segregated.

Possibly the concern with the second type of case is whether the investment activity of the SMSFs are being conducted on an arm’s-length basis and in accordance with the sole purpose test.