Key Points from ATO Commissioner’s Speech to the 2011 SPAA Conference

The Tax Commissioner, Mr Michael D’Ascenzo, in his speech to the 2011 SPAA Conference discussed a number of issues which are particularly relevant to self managed super funds.

The key points from his speech covered the consequences of natural disasters on funds which have invested using limited recourse borrowings; the excess contributions tax discretion and the audit focus for 2011/12.
 

Natural Disasters & Limited Recourse Borrowing

In relation to the consequences of natural disasters, the Commissioner noted that there had been media speculation that funds which acquired real estate by limited recourse borrowing arrangements may be prevented by the SIS rules from repairing any flood or cyclone damage suffered by the real estate.  The SIS rules applying to limited recourse borrowing do make a distinction between repairs (permitted) and improvements (not permitted) and it is irrelevant whether the fund borrows to finance the repairs or improvements as against using its own cash resources.  

While the Commissioner correctly stated that the ATO has no discretion to treat improvements as if they are repairs, the Commissioner did indicate that the ATO will not be making fine distinctions between repairs and improvements.  Additionally, it seems, the ATO will be prepared to provide guidance as to what constitutes a repair and what constitutes an improvement.  Finally, it seems that the ATO will take a sympathetic view if funds do breach the SIS rules when repairing their properties to treat the fund as not having lost its compliance status.

A sympathetic view is not carte blanche: funds having to undertake major repairs to real estate acquired by limited recourse borrowing should take up the Commissioner’s invitation and contact the ATO about the scope of works before the remedial work commences. This will ensure that the boundary between repairs and improvements has not been crossed.

 
Excess Superannuation Contributions Tax

The Commissioner also discussed excess contributions tax.  His news on this subject was not welcome.  He noted that 8% of taxpayers affected by excess contributions tax assessments have applied to the Commissioner to apply his statutory discretion to carry back, carry forward or disregard the excess contributions.

Of the requests for the exercise of the discretion, the request has been successful in about 20% of the cases: in other words, the likelihood of a request being successful is about 1 in 5.

The Commissioner noted that the main reasons for exceeding contributions caps are:

• incorrect reporting of contributions by funds (eg reporting rollovers and transfers as contributions)
• taxpayers acting on poor professional advice
• taxpayers not understanding the contributions caps (particularly in relation to the May 2006 to June 2007 and the period 1 July 2007 to 30 June 2008)
• downward adjustments to claims for tax deductions for personal contributions
• untimely implementation of salary sacrifice arrangements – where a salary sacrifice is made in relation to one financial year but the payment is effected in the following financial year.

Incorrect professional advice or errors in contribution management will not be sufficient to trigger the Commissioner exercising his discretion to disregard or adjust excess contributions. Advisers should therefore beware that the affected member may have a claim for incorrect professional advice.

Compliance Focus for 2011/12

The ATO expects to conduct extensive audits on about 2,000 SMSFs during the 2011/12 financial year.  In selecting the funds for audit attention, funds which have a pattern of repeated contraventions will be greatly favoured.

The ATO will be looking at funds which have engaged in limited recourse borrowing arrangements (and funds which report a deduction for interest payments).

Also, close attention will be paid to funds which have reported past contraventions of the in-house asset rules.  It seems that such breaches have had a significant occurrence in recent years as operators of the funds have used loans from the fund to support the cash flow of their businesses.

The Commissioner advised that a significant number of the 185 self managed superannuation funds which were made non-complying during the 2009/10 financial year had breached the in-house asset rules, and the breach had been for a considerable time and represented a large value of the fund with little or no attempt to repay the loan or interest.