True Stories from the SMSF Tax Return Front!

The Assistant Commissioner, to illustrate the SMSF tax return errors, provided the following true story relating to exempt current pension income.

The SMSF annual return is designed to record all income (both taxable and exempt) and then separately exclude exempt income as if it were a deduction.  Consequently, the most significant deduction item in SMSF returns tends to be for “exempt current pension income”.

There have been a number of significant calculation errors relating to “exempt current pension income”.  For example, investment expenses, management and administration expenses being included as part of the “exempt current pension income”. 

Exempt current pension income is seen by the ATO as being a significant compliance risk and will be targeted in the current year’s compliance strategy.

In one audit case the tax agent was requested to provide his calculation of the amount of “exempt current pension income” which had been reported in the fund’s annual return.  In particular, the ATO requested relevant documents demonstrating the segregation of the fund’s assets and the actuary’s certificate in respect of any un-segregated current pension assets.

As the particular tax agent was unable to supply either an actuary’s certificate in respect of the un segregated current pension assets or documents supporting the segregation of segregated current pension assets, the resulting audit action was:

• a decreasing adjustment of over $780,000 being made at the Exempt Current Pension Income label
• a $117,000 tax shortfall being raised; and
• penalties of over $21,000 being imposed.