18 | ATO 2019 SMSF Hit List
Here is the ATO 2019 SMSF Hit List. Listing problem zones the ATO intends to focus on in 2019.
ATO 2019 SMSF Hit List
There are 12 issues the ATO intends to focus on for the 2018/19 financial year, but many of these will probably feed into later years as well.
# 1 Total Superannuation Balance
The ATO actively monitors your total superannuation balance (TSB).
In plain English your TSB is the total of all your accumulation and pension accounts. It basically is what you have in super at current market values.
In more technical terms the TSB is the total of your accumulation phase value (APV) plus retirement phase value (RPV) plus any rollover in transit less any personal injury or structured settlement contributions.
Your TSB will impact whether you can a) carry forward concessional contributions, b) make non-concessional contributions, c) bring forward your non-concessional contributions, d) receive government contributions, e) provide a spouse tax offset to your contributing spouse, f) use the segregated asset mthod and g) have an issue with reserves.
Various TSB thresholds apply to these actions.
# 2 Transfer Balance Account Reporting
Your transfer balance cap (TBC) limits how much you can move from accumulation to pension mode. Your transfer balance account (TBA) tracks these movements.
Your transfer balance account reporting (TBAR) allows the ATO to monitor how much space you have left in your TBA before you hit your TBC.
If you exceed your TBC, the ATO will issue an Excess Transfer Balance (ETB) determination requiring you to commute the excess back to accumulation.
# 3 Market-Linked Pensions
Market-linked pensions impact your transfer balance account but to what extent is complicated to determine.
The ATO particularly focuses on cases where you commute a market-linked pension but then start a new one.
# 4 Reserves
Reserves are an issue since potentially used to get around restrictions and caps. Hence the ATO’s interest when you increase new or existing reserves without a valid reason or directly allocate from reserve to retirement phase.
In such cases the ATO can invoke the sole purpose test in s62 SIS Act and Part IV AQ ITAA36 and treat the allocation of reserves as a concessional contribution. To avoid this you need to allocate a reserve in a fair and resonable manner to all members of your SMSF and keep reserves below 5% of members’ TSB.
# 5 Multiple SMSFS
There might be a genuine reason for you to have multiple SMSFs. You might be part of a blended or large family or pursue different investment strategies to cover different life stages. The ATO acknowledges this.
But multiple SMSFs can also be an issue. For two reasons. They make it harder to track your TBA.
And they might allow you to save tax by repeatedly switching between accumulation and retirement phase to ensure that gains and income are always incurred by assets in retirement phase rather than accumulation.
# 6 SMSF registration
Just because you register an SMSF doesn’t mean that the ATO will let it live. The ATO reviews members’ motivation, financial history and business acumen as well as the compliance history of advisers involved.
Where there is an issue, the ATO can cancel a SMSF’s ABN or withhold the details from Super Fund Look Up. The result is that employers can’t pay SG contributions and super funds can’t rollover benefits into these SMSFs.
# 7 SMSF auditors
The ATO uses smart data to find SMSF auditors also acting as tax agents for an SMSF or auditing their own SMSF. Another focus are low-cost as well as high-volume auditors.
# 8 Non or Late Lodgement of Annual Returns
About 10% of SMSFs fail to lodge annual returns on time, which is obviously a concern to the ATO.
# 9 Disqualification of Trustees
The ATO can disqualify a trustee for various reasons. The most common ones are early release of super assets without meeting a condition of release, dividend stripping, non-lodgement of annual returns and failing to rectify a contravention.
# 10 Aggressive Tax Planning
Aggressive tax planning is nothing new. But the transfer balance cap will probably give rise to a new breed of schemes trying to get around it.
# 11 Dividend Stripping to an SMSF
This one is confusing since there are actually two forms of dividend stripping. Dividend stripping in its original form is when you time the purchase and sale of shares around the ex-dividend date. This is what the finance world refers to as dividend stripping.
And then there is what the ATO refers to as dividend stripping to an SMSF. It is when you transfer shares to an SMSF to get a refund of franking credits.
Trading Shares around Ex-Dividend Date
Dividend stripping as such is when you buy shares before the ex-dividend date with a view to sell shortly after ex-dividend.
At ex-dividend the share price should drop by the amount of the dividend. In theory. But in practice it often doesn’t. The share price of quality shares often barely moves ex-dividend and recovers within days or weeks.
So if you buy the shares before they go ex-dividend and then sell after they regained their original value, you can make a profit. You get your money back (less transaction costs) plus the cash dividend plus – provided you stay within the 45 days rule – any franking credits attached.
You achieve all this by either trading the actual shares or leveraging your approach through traded options, contracts for difference (CFDs) or other equity derivatives. But to keep your franking credits, you must hedge no more than 70% of your exposure.
So this is dividend-stripping in an nutshell. It might sound like a safe way to make money but of course it isn’t. There is a reason why CFDs are also called contracts for dummies.
An SMSF might do dividend-stripping in this form. It might buy shares a few weeks before the ex-dividend date and then sell shortly after. And there is no issue. Just watch out for the 45 days and the 70% leverage rules.
But what the ATO refers to in their hit list as dividend stripping is actually something different.
Transferring Shares to an SMSF
Let’s say you hold 51% of a company’s shares in your own name. The company makes a profit and pays tax at corporate tax rates. But this corporate tax rate is really just a withholding tax. In the end – when the company pays dividends to you – you pay tax on these dividends at individual tax rates, which might be as high as 45% plus 2% Medicare.
However, when you hold the shares in an SMSF and you are in pension mode, the SMSF pays 0% tax on any dividends it receives. But what is even better is that the SMSF gets a refund of franking credits, meaning a refund of the tax the company paid. And when your SMSF pays these gross dividends out to you in form of a pension or lump sum withdrawal, you also don’t pay any tax.
So the options are full tax or no tax. It is obvious which one you will prefer. And so you transfer the shares to your SMSF.
This is what the ATO calls dividend-stripping to an SMSF and the ATO doesn’t like this ‘contrived arrangement’ for three reasons. The investment might not meet the sole purpose test, in-house asset rules and related party rules.
So due to these concerns the ATO will focus on what they call dividend-stripping to SMSFs.
# 12 High-balance SMSFs
The ATO will focus on the largest 100 SMSFs based on total assets reported during the 2016/2017 year. And look for non-arm’s length income, dividend stripping and structured arrangements designed to avoid tax.
The ATO uses a carrot and stick approach. Its primary focus is to support, inform and assist. But – when this doesn’t work – to provide a strong response.
A strong response might include administrative penalties, disqualification of trustees, education directions, rectification orders and notices of non-compliance. A notice of non-compliance makes an SMSF a non-complying superannuation fund, removing the ECPI tax exemption. ECPI stands for exempt current pension income.
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Last Updated on 21 March 2019