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June 2014 issue
Review funds now or be penalized later
Commencing from 1 July 2014,
the ATO will have a broad range
of graduated penalties and
administrative directions at its
disposal to address any noncompliance of he
superannuation laws, in addition
to its existing powers.
SISFA has long advocated that
the ATO needs to possess and
apply effective, flexible and
proportionate powers to address
contraventions of the law.
Background
Currently, the ATO has a limited
number of tools available to
deter and address
contraventions including:
•
making an SMSF
non-complying for tax
purposes;
•
applying to a court for civil or
criminal penalties to be
imposed;
•
accepting an Enforceable
Undertaking (EU) in relation
to a contravention; and
•
disqualifying a trustee of an
SMSF.
The ATO has rarely used its
existing range of powers except
in cases of significant
non-compliance with the law
because the potential
consequences are considered
“disproportionately high”.
This has meant that a number of
SMSF trustees have effectively
avoided sanction for
contravening the law simply by
rectifying the conduct when it is
detected. This has not provided
sufficient encouragement for
voluntary compliance.
Main points
The new rules introduce a
system of administrative
directions and penalties for
contraventions relating to
SMSFs that occur on or after 1
July 2014, including:
•
•
providing the ATO with
powers to give
rectification directions
and education directions;
and
imposing administrative
penalties for certain
contraventions of the
law.
The new rules provide the ATO
with the ability to give a
rectification direction or an
education direction where it
reasonably believes that a
trustee or director of a corporate
trustee of an SMSF has
Inside this issue
Page 3 Problems with Market Value reporting
Page 4 Changes within SISFA
Page 4 Recent Media Coverage
contravened a provision of the
superannuation law.
A rectification direction will
require a person to undertake
specified action to rectify the
contravention within a specified
time frame and provide the ATO
with evidence of the person’s
compliance with the direction.
An education direction will
require a person to undertake a
specified course of education
within a specified time frame
and provide the ATO with
evidence of completion of the
course. The person will also be
required to sign or re-sign the
Trustee Declaration form to
confirm that they understand
their obligations and duties as a
trustee or trustee director of an
SMSF.
Penalties imposed under the
new administrative penalty
regime are payable personally
by the person who has
committed the breach and
therefore must not be paid or
reimbursed from assets of the
SMSF.
Administrative penalties
An administrative penalty is not
imposed for all contraventions of
the SIS Act, only those included
in a table in the Act. These are
summarised on the next page:
Lorem
Sisfa news
Ipsum
Trustee structure is relevant
If a trustee that is a body corporate
becomes liable to an
administrative penalty, then the
directors of that body corporate are
jointly and severally liable to pay
the amount of the penalty.
However, for individual trustees
penalties will be imposed on each
of them.
Example - Individual trustees
who contravene a provision
(adapted from EM)
Jill and Merryn are members and
individual trustees of Yellow
SMSF. Jill and Merryn fail to
ensure that accounts and
statements for Yellow SMSF are
prepared for the 2014-15 year of
income. As a result, each
individual trustee has contravened
section 35B.
An administrative penalty of 10
penalty units is imposed on each
individual trustee of Yellow SMSF
in their personal capacity (at $170
per unit). Jill and Merryn are each
liable to an administrative penalty
of $1,700 each (totalling $3,400).
JUNE 2014 ISSUE
Administrative penalties
Contraventions of superannuation laws
Penalty
Contributions standards, preservation standards,
benefit payment standards, investment strategy
$3,400
Preparation of annual financial statements, keeping of
minutes, notification of changes to trustees, keeping
records for 10 years, failure to comply with
rectification directions or education directions
$1,700
Borrowing restrictions (such as with limited recourse
borrowings), in-house asset restrictions, prohibition of
loans and financial assistance to members and
relatives, notification of significant adverse events
$10,200
Appointment of investment managers, providing
information and statistical data to the ATO
$850
These administrative penalties are only imposed in relation to
SMSFs.
Watch out for “carry-over” contraventions
Some contraventions only occur in the year of income a particular
transaction took place. However, certain transactions, if not
rectified, may cause trustees to contravene the SIS Act or SIS
Regulations over a number of income years.
For example:
•
SMSF trustees are prohibited from borrowing money or
maintaining an existing borrowing of money, except in
limited circumstances. Therefore, trustees may contravene
this provision in the year of income that the borrowing is
undertaken and for each year of income the borrowing is
maintained in breach of the rules. Hence, any existing
Limited Recourse Borrowing Arrangements ought to be
thoroughly examined by advisers and independently
audited to ensure no carry over contraventions arise.
•
Similarly, where the market value of a fund’s in-house
assets exceeds the five per cent threshold, the trustees are
required to prepare a written plan before the end of the
following income year and carry out steps to ensure that
the Fund’s in-house asset ratio returns to five per cent or
less.
Contribution courtesy of Darren Kingdon, Principal of
Kingdon Financial Group and Director Self-managed
Independent Superannuation Funds Association
Sisfa news
JUNE 2014 ISSUE
3
Market value reporting
The majority of SMSFs have been audited for the financial year
ended 30 June 2013, the first year when regulation 8.02B of SISR
required fund assets to be recorded at market value.
The more problematic assets have been real property, unlisted
company and closely held unit trust investments. A significant point
of contention has been trustee reliance on ATO document Valuation guidelines for self-managed
superannuation funds. Whilst this guidance is useful to determine ATO expectations it is the Australian
Auditing Standards that the auditor must adhere to.
ASA 500, Audit Evidence, mandates that “(t)he auditor shall design and perform audit procedures that are
appropriate in the circumstances for the purpose of obtaining sufficient appropriate audit evidence”.
Instances have been seen where market values determined in accordance with the methodology of the
ATO guidelines has not been supported by sufficient appropriate audit evidence.
Even where an independent valuation is provided for audit to support market value ASA 500 compels the
auditor, to the extent necessary, having regard to the significance of that expert’s work for the auditor’s
purposes:
• Evaluate the competence, capabilities and objectivity of that expert;
•
Obtain an understanding of the work of that expert; and
•
Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
Additionally, ASA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures, requires the auditor to obtain sufficient appropriate audit evidence that fair value
measurements and disclosures are in accordance with the applicable reporting framework. The auditor
needs to assess the rationale for selecting the valuation method and exercise professional judgement in
determining whether the method selected is appropriate given the nature of the asset.
We have seen a limited number of fund investments for which sufficient appropriate evidence of market
value was not provided most commonly because the cost of obtaining the evidence was prohibitive for the
trustee. In these cases the only option was to modify the auditor’s conclusion in the audit report.
These matters will become more contentious if section 35B of SISA or regulation 8.02B of SISR is included
as reportable in the 2014 Auditor Contravention Report when trustees will need to decide between the
costs associated with valuations and the potential ramifications of a contravention report.
Contribution courtesy of Daniel Prunty
Audit Manager Veritas Corporation
Sisfa news
5/6/2014
JUNE 2014 ISSUE
SISFA rebuts SMSF systemic risk
Changes at sisfa
We are pleased to confirm the appointment of Mr
Nick Brookes to the newly created position of
NEWS / ADVISER NEWS
SISFA rebuts SMSF systemic risk
Managing Director of SISFA. As SISFA enters
an exciting new phase in its development, the
Board is delighted that Nick has agreed to steer
SISFA along this course. More details to follow
soon.
ISFA chair Michael Lorimer
05 May 2014
By Darin Tyson-Chan
The Self-managed Independent Superannuation Funds Association (SISFA)
has refuted recent claims from certain quarters of the industry that there is
systemic risk involved with the SMSF sector.
“Systemic risk in our superannuation system would only reside at the big end of town.
How systemic risk occurs is if you’ve got one massive entity that experiences any
particular failure that in turn affects hundreds of thousands of individuals in one fell
swoop,” SISFA chair Michael Lorimer told selfmanagedsuper.
“Just because you have one SMSF that makes a poor investment decision, or is the
subject of bad advice or the like, it doesn’t affect the other 509,000 SMSFs.
After a long association with SISFA, John McIlroy
has resigned as a director and Treasurer
John was a founding member of SISFA and the
Board thanks him for the enormous effort he has
volunteered in assisting in the to growth of the
association over all this time. We wish him all
the best in the future.
“So the chances of the SMSF sector failing as a sector is virtually zero. It’s not going to
happen.”
Lorimer said statements suggesting the sector had inherent systemic risk associated
with it indicated a larger part of the financial services industry still did not understand
how the SMSF arena was structured and how it operated.
“The challenges the SMSF sector has had to face over my entire career have always
been the same,” he said.
“Most of it can be explained by coming from self-interested parties who don’t like the
sector for all sorts of reasons and genuinely don’t understand it. And they’ve never
understood it.
“The SMSF sector is a collective of a whole bunch of individuals and until the big end
of town properly understands that fact, they will never be able to properly participate
or have an informed view on how the SMSF market works.”
Apart from the misguided commentary, the product innovation offered by some of the
Australian Prudential Regulation Authority-regulated funds to counter SMSF leakage
was another illustration of the lack of knowledge about the sector, he said.
“Some of the big funds have come out and said ‘we’re a bit concerned a few of our
people with large balances are leaving and setting up SMSFs so, guess what, we’ll put
in a DIY option in our fund so people can do their own share investing through our
platform’,” he said.
“That not what people want. They’re building these things and they genuinely don’t get
it.
“People don’t set up an SMSF just so they can do some share trading. It’s all about
control and ownership and they know that even if they’ve got plenty of investment
options through a particular platform, if ultimately it is still sitting under the auspices
of a totally arm’s-length prudentially regulated trustee, they know it’s not really under
their control.
“That’s why people opt for an SMSF.”
http://www.smsmagazine.com.au/articles/sisfa-rebuts-smsf-systemic-risk
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JUNE 2014 ISSUE
Sisfa board
Michael Lorimer
Chairman
MGD Wealth Ltd Qld
ml@mgdwealth.com.au
Mr Robert Jeremiah – Chair
Technical Committee
Sladen Legal VIC
rjeremiah@sladen.com.au
Mr Robert Shelton, Treasurer
DFK Everalls
Canberra ACT
Robert.Shelton@DFKeveralls.c
om
Mr Peter Rimmington
Crowe Horwath, Qld
Peter.Rimmington@Bri.crowe
horwath.com.au
Mr Robert Stark
Self Managed Retirement
Systems, WA
rstark@afswl.com.au
Mr Nick Brookes,
Managing Director
VICTORIA
ndjbrookes@bigpond.com
Mr Andrew Cullinan Chair Policy
Development Committee
andrew.cullinan@leebridgegroup.com.au
Leebridge Group, Chartered Accountants
Ms Carmel Riordan
Carmel Riordan Lawyers Adelaide, SA
criordan@adam.com.au
Mr Darren Kingdon
Managing Director
Kingdon Financial Group Limited,
Queensland
darren@kingdonfinancialgroup.com
.au
Mr Craig Fishburn
Superannuation Audit Services,
craigfishburn@superannuationaud
itors.com.au