Rectification headaches in order for ATO amendments

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From 1 July the Australian Taxation Office (ATO) will have new powers to bolster SMSF standards, and the change could mean the issuance of many more rectification orders with serious consequences for some trustees.

This is according to Chris Morcom, the director of Hewison Private Wealth.

Morcom spoke to Wealth Professional in anticipation of the amendments, which he says are positive for both the ATO and superannuation members, but will be a “wake up call” for some people.

Currently, the rigid and inflexible ATO rules for breaches, which include court action and the removal of tax fund concessions, are often considered too costly, time consuming and disproportionately draconian for the severity of the offence.

The new punishments mean the ATO will be able to impose administrative penalties on trustees, which cannot be paid for or reimbursed from assets of the fund.

It would also allow the ATO to order trustees to attend compulsory education courses at their own expense, or issue rectification orders.

It will be mandatory for auditors of the fund to report any breach they find to the ATO, which has stated it will follow up on every single one.

Morcom predicts that the power to order trustees to rectify a problem within their fund could cause serious flow-on consequences, especially if they are forced to sell assets.

“I think the biggest problems are where people have been using the limited recourse borrowing arrangements incorrectly,” he said. “[The ATO] could order a penalty plus a rectification order, but some people may not have the money to fix this so there’s the potential they will be forced sellers of that asset to fix up the breach.”

The consequences of this will be if the asset has gone down in value there will be a loss; yet if it has gone up in value there could also be capital gains tax to be paid.

“I suspect there will be a larger number of fixes required than anticipated,” Morcom said.

Another area which is important to focus on in light of the looming ATO amendments is that of the move to raise the non-concessional contributions cap from the current $150,000 to $180,000 in 2014-15.

While this has been widely regarded as a positive, Morcom said it’s vital for trustees to make sure they haven’t inadvertently made excess contributions, which could result in an accidental triggering of the bring-forward rule and hefty tax bills.

“Let’s say your concessional contribution limit is $25,000 and you put in $30,000 because you misread something, so you’re $5,000 over,” he said. “That is an excess concession contribution. If you do nothing this will be taxed at a higher rate and it also gets added on to your non-concessional contributions, which could trigger the bring forward rule if you have already maximised your non-concessional contributions.”

There is now the ability to have the excess contribution refunded, but people need to make sure they get this fixed in the appropriate time frame.

The higher non-concessional contributions caps will also mean people need to think hard about what strategy to use for their SMSFs – whether to trigger the bring forward rule now, or wait until the next financial year and be able to contribute an extra $90,000.

Anyone who has already used the bring forward rule over the past two years will be unable to do this, Morcom said.

“We’ve got clients who already put the maximum they could last year and they’ll just have to wait. It’s not a massive issue, but people do need to plan accordingly.”

And as the ATO amendments focus on administration requirements, SMSF trustees have between now and 30 June (after which the ATO will start acting on any breach) to make sure their funds are organised and compliant.

Morcom gave five tips to help advisers and their clients prepare:
  1. Make sure your fund is compliant with the new legislation – the amendments include a catch all, which is a breach of a “multitude” of prescribed standards.
  2. Make sure your super fund records are up to date and filed securely – the amendments will require some records such as trustee decision, member reports, and changes of trustees to be kept for 10 years.
  3. Advisers need to make sure their clients are aware of all the changes.
  4. Review your contribution strategy to – a.) maximise the concessional contribution, and b.) use the non-concessional limits effectively.
  5. Make sure the usual end-of-year checklist is continually carried out and recorded – this includes reviewing minimum and maximum pension limits, ensuring the investment strategy is up-to-date, the fund investments comply with the strategy and consider insurance for the fund members.
“The warning has been put out, and SMSF trustees should now be looking at their fund and making sure it’s compliant,” Morcom said.


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