SMSF regulation: an update

SMSF Association National Conference 2019 at the Melbourne Convention & Exhibition Centre


Hello, thank you for inviting me to be part of the SMSF Association’s 2019 National Conference.

Participating in events such as these provides us with the opportunity to share with industry our perspective as regulator. We value the support that the SMSF Association provides us in our role as a regulator and tax administrator of self-managed superannuation funds (SMSFs).

The theme of this year’s conference is ’strength’ which is certainly fitting given how strongly the SMSF sector has grown, both in terms of the increase in the number of trustees and members, and the growth of assets held by SMSFs over the last 20 years.

This graph represents the growth of the SMSF sector, showing an increase in number of trustees and members (close to 600,000 funds, with over 1.1 million members) as well as the growth of assets held by SMSFs (estimated total value of assets held of $755 billion) over the last 20 years.

The SMSF sector comprises close to 600,000 funds, with over 1.1 million members, and an estimated total value of assets held of $755 billion (nearly a third of total super assets). The importance of good governance of the sector, therefore, cannot be underestimated.

SMSFs are a significant part of the super landscape and as the regulator of SMSFs, the ATO plays a key role in ensuring individuals comply with the relevant regulations and laws.

The ATO aims to create a future where super is seen, valued and owned. We want to be recognised as a key contributor to people being confident in their ability to manage and monitor their retirement savings.

It’s our 20-year anniversary this year as the regulator of SMSFs and what I can say we have observed is that the vast majority of people who set up an SMSF are doing so for the right reasons and for those people, our aim is to support them on their journey.

So while today I’m going to spend some time talking about how we manage those who don’t do the right thing, I think it’s important to remember they represent a small minority of the overall population.

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – Final Report

Before I talk about our program of work, it’s important to spend some time talking about the report by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, handed down by Commissioner Kenneth Hayne on 1 February and what it means for the ATO as a regulator of the SMSF sector.

Whilst SMSFs were not part of the Commission’s terms of reference, they are part of the financial system and we must all be responsive to what’s happening in that system.

In relation to regulation and the role of regulators, Commissioner Hayne made the point that, ‘Compliance with the law is not matter of choice’ and ‘Negotiation and persuasion, without enforcement, all too readily leads to the perception that compliance is voluntary. It is not.’

Now, while this is certainly true and applies across the super industry, Commissioner Hayne also acknowledged there is a difference in how corporations and individuals respond, quoting American scholar Malcolm K Sparrow (The regulatory craft: controlling risks, solving problems, and managing compliance, Brookings Institution Press, 2000, p 63): ‘Corporate behaviour moves quickly to take advantage of any perceived softening. Social norms act less upon complex organizations than upon individuals’ This recognises there’s a difference between dealing with individuals, who are perhaps more motivated to behave well and comply, and large organisations.

We recognise there’s a difference in the balance to be struck between the APRA-regulated super industry – where third-party trustees are responsible for members’ retirement savings – and the SMSF sector where trustees are responsible for managing their own wealth.

In our world, where members and trustees are one and the same, I want to assure you that maintaining the appropriate balance between education and enforcement is vitally important to us as the regulator of SMSFs.

Many Australians want to take and are taking control of their retirement savings and our aim is to support these people to make informed decisions while maintaining the integrity of the sector.

All of our compliance, education and monitoring activities are framed around the desire to:

  • support a robust and resilient SMSF sector
  • encourage willing participation with the laws and regulations that govern that sector
  • ensure all participants in the sector are complying with their obligations.

Where contraventions have occurred but individuals are willing and able to continue to meet the obligations of running their SMSF, we will direct our actions to rectify compliance and assist them to get back on track. This is for the majority of SMSFs.

In the most egregious circumstances, where SMSF trustees show a blatant disregard for the law or seek to misuse their SMSF to take advantage of the generous tax concessions that apply to super, we will take the firmest action, including making funds non-complying and disqualifying the trustees.

In the context of striking an appropriate balance between managing the risks in the system and providing support and tools to participants to protect its integrity, I will cover two areas today: firstly, how we’re managing current and emerging risks and then I’ll announce some new steps we’re taking to improve education and tools for professionals in the sector.

Our compliance program

I’ve mentioned that we want to promote trust and confidence and encourage willing participation in the super system. To support this goal, a large part of our work program is centred on:

  • building relationships with the different participants in the SMSF industry
  • providing tools, services, technical guidance and assistance to trustees and their advisers to enable them to govern, appropriately manage and protect their retirement savings.

However, that’s only one aspect of our responsibility as regulator. In order to protect the integrity of the sector, we also need to identify and address compliance issues as they arise through our compliance program.

Last year, some of you may have heard us talk about our risk focus areas for the 2019 financial year. Today, I’ll update you on the action we’ve taken to address these risks and what we’ve found so far.

Each year we analyse our data to identify key risk areas that will then form part of our compliance program.

The following is a summary of our current compliance focus:

  • illegal early release (IER) and promoters
  • non-lodgment
  • top 100 and tax planning arrangements
  • top 100 auditors
  • high-risk auditors.

SMSF illegal early release and promoters

One of our key compliance strategies involves targeting individuals (and promoters) who are registering SMSFs with the sole intent of using the SMSF as a vehicle to illegally access super benefits.

Illegal early access undermines Australia’s retirement system. It places an unfair burden on the community because individuals who illegally access their employer super guarantee and voluntary contributions are more likely to become reliant on the age pension when they retire.

In the 2018 financial year we disqualified 257 trustees who were trustees of 169 funds. IER and loans to members was the reason for disqualification in over 70% of cases.

Action we’ve taken so far this financial year

In the first half of this financial year, there were 12,211 new registrants. We reviewed approximately 10% of these, with our primary focus being to check for IER.As a result of these reviews, 123 funds had their details withheld from Super Fund Look Up (SFLU), meaning they were unable to receive payments or rollovers; and 329 newly registered SMSFs had their registration cancelled.

This means we took action on over a third of the cases picked up by our risk models and we protected $45 million dollars of retirement savings.

What we’re seeing

IER most commonly occurs where individuals:

  • want to access money due to:
    • financial stress (for example, unemployment, marital breakdown, debt) or
    • a desire to spend on a present-day benefit (such as a holiday or deposit on a home) or
  • know little or nothing about setting up or running an SMSF and are targeted by unscrupulous promoters.

As a co-regulator of the sector, we work very closely with ASIC to co-ordinate our activities in relation to such operators. ASIC is of course responsible for licensing financial advice providers, while the ATO regulates SMSFs.

We regularly meet with our colleagues at ASIC and share information; for example, intelligence about organisations or people who encourage the establishment of an SMSF as the vehicle to invest in their products inappropriately.

We will refer matters to ASIC:

  • if we’re concerned that the organisation or person may not be licensed to provide financial advice, or
  • if there is potential misconduct in relation to providing financial advice.

We also work jointly with ASIC on some cases; ASIC investigates the provider of the advice or investment vehicle and we look at any regulatory breaches by the SMSF.

SMSF non-lodgment strategy

The next compliance strategy I’ll cover is our non-lodgment program of work.

A trustee’s most fundamental obligation is to lodge their SMSF’s annual return (SAR) after their records have been independently audited, and I’d like to reiterate how important we consider this obligation to be. While 86% of SMSFs do lodge on time, which is terrific, there is still work to be done with the 14% who don’t.

Last year we undertook our first non-lodgment program, reducing non-lodgers from approximately 87,000 to 66,000. This work yielded a number of key insights that have enabled us to take more targeted action this year.

Our overarching observation is that non-lodgment is a strong indicator that the retirement savings of SMSF members may be at risk.

For example:

  • SMSFs that have trouble with their first lodgment seem to continue to struggle to meet their compliance obligations
  • trustees who have been complying, tend to stop lodging when they encounter administrative or regulatory issues. Once they stop lodging, they often don’t get back on track, creating a snowball effect.
  • we also know that non-lodgment in the first year of registration is a strong indicator of IER.

Building on these insights, this year we’ve developed a targeted program for four distinct sub-populations of non-lodgers:

  • lapsed lodgers – those who have lodged in the past, but have not lodged for a number of years
  • first-time non-lodgers – those who have missed a lodgment for the first time
  • first-year never-lodgers – those newly registered SMSFs that fail to lodge their first return
  • never lodgers – those who haven’t lodged at all since they registered.

Lapsed lodgers

So far this year we’ve identified 64,000 ‘lapsed lodgers’. These SMSFs have an average of 3.4 years of overdue SARs. According to the last return they lodged, they hold approximately $27 billion in fund assets that are potentially at risk. About 4,000 of the SMSFs in this population had an auditor contravention report (ACR) lodged with the last SAR they lodged.

To address this risk we’re taking a number of actions.

  1. Our first action for the lapsed lodger group was a targeted mail out to the 570 SMSF auditors and 2,728 tax agents with an SMSF with one or more overdue lodgements. We reminded them of their obligation to lodge and informed them that we would take action if they didn’t contact us within 28 days. We coordinated this mail out with the Tax Practitioners Board, who wrote to its members in relation to their outstanding personal tax obligations outlining the potential consequences.

This group was the first cab off the rank in our lapsed lodger program because we have the highest expectation of tax agents and SMSF auditors, given their professional standing and role in maintaining the integrity of the system. We also know that poor compliance by this group tends is correlated with poor compliance by their clients.

To date, approximately 30% of the auditor and tax agent population are now back on track.

In relation to the remaining 70%, where they are not actively working with us to bring their lodgments up to date, we will refer them for audit where the range of possible actions includes:

  • penalty for failing to lodge SAR on time
  • default assessments for each year of non-lodgment to estimate tax payable, and penalties of up to 75% of any shortfall
  • disqualifying the trustees
  • a notice of non-compliance, with significant negative tax consequences for the SMSF.
  1. In addition to our work with the tax agent and auditor group, we’ve also started to contact the full population of lapsed lodgers to encourage them to bring their overdue lodgments up to date. We’re encouraging them to contact us if they need assistance.
  2. We’ve also removed SMSFs with lapsed lodgments from SFLU, which means they can no longer receive contributions or rollovers.

First time non-lodgers

The second group on which we’re focussed is first time non-lodgers.

Given our finding that once SMSFs stop lodging for the first time, they often stop lodging all together, we have an increased focus on those SMSFs who have not lodged for the first time as a preventative action against potential long term non-lodgment.

We’ve identified approximately 26,000 SMSFs with a previously good lodgment history who haven’t lodged their 2017 SAR; they are a sub-population of the 64,000 just mentioned.

We’re contacting all these SMSFs to let them know, if they don’t lodge:

  • they’re putting their good compliance status at risk
  • their SMSF will be removed from SFLU, preventing it from receiving further payments or rollovers.

We’re also encouraging them to engage with us via our SMSF early engagement and voluntary disclosure service to negotiate a way forward.

This brings me to our strategy in response to the never-lodger category.

First year never-lodgers

Before I talk about the never-lodger population more broadly, I’d like to outline what we’re doing to address a special sub-group of ‘never-lodgers’ group. We’re paying very close attention to first year never-lodgers as our first priority because of the potential for IER.

We have identified approximately 6,500 SMSFs who registered in 2017 and whose first return was due on 28 February 2018.

We’ve contacted all these funds. Where they received a rollover we’ve asked them to lodge or contact us if they need help. These may just be a group of the early ‘strugglers’ who are new to the system or there could be potential IER.

Where there was no rollover and it appears the SMSF has never operated, we’ve asked them to cancel their registration if this is the case.

If we don’t get a response, we’ll take the fund off SFLU and for those where we can see there has been a roll over, take action on the basis there has been IER.

We’ll be doing the same for the 2018 financial year for those new SMSFs whose returns are due on 28 Feb 2019 – we will be writing to this group as soon as the return is overdue.

Never lodgers

Now, turning to the long-term never-lodger population with two or more overdue returns; our recent data analysis has identified some sobering facts:

  • the population of SMSFs that have registered between 2013 and 2018 and have never lodged is just under 30,000 (this includes the 6,500 first-year never lodger group)
  • of these 30,000, over 50% are funds that appear to have received a rollover from an APRA fund
  • there’s been a steady increase in the number of these funds over the past five years
  • the average amount of the rollovers into these funds steadily increased from $78,000 in 2013 to $140,000 in 2017
  • the average age of trustees in funds that have never lodged is 36.

We’ve undertaken a pilot of 200 funds to understand this population. Our analysis shows a variety of reasons for never lodging. Some trustees have never operated, some admitted to IER and some have brought their lodgments up to date. We’ll be doing a mail out within the next few months to the entire never-lodged population.

As with first-year non lodgers, where funds haven’t received a rollover and it simply appears the individual never operated the SMSF, we will ask them to cancel their registration.

Where they have received a rollover, we will ask them to lodge and take further action if they fail to do so.

SMSF auditor number misuse

In the context of lodgment, an emerging risk we’re focussing on as part of our trustee work is SMSF auditor number (SAN) misuse.

Every SMSF tax return must include the fund’s approved auditor number as evidence that an audit has bene done before the lodgment of the return.

We’re concerned that some trustees are quoting incorrect SANs, either in genuine error or in an attempt to conceal that an audit hasn’t been completed.

There are currently 100 SMSFs, represented by 22 agents, under investigation. Of the 40% of cases completed, we’ve found approximately 85% were inadvertent errors; but the remaining 15% were deliberate misuse.

We’ve identified another 231 cases for review.

Where we identify SAN misuse our approach will depend on the circumstances of each case.

  • Where the misuse is due to a genuine mistake, we’ll work with the trustee or tax agent to rectify the error by lodging an amended return.
  • Where the misuse is deliberate, we will seek to impose penalties on the trustee and/or tax agent and refer the tax agent to the Tax Practitioner Board.

In 2018, we referred five agents to the Tax Practitioners Board (TPB) for deliberate SAN misuse and we’ve referred an additional agent this year – that is the full 15% I just mentioned.

It is critical that we support our key stakeholders to protect the integrity of the system. This financial year, in response to requests by SMSF auditors we’ve already sent 93 SMSF lists to approved auditors to cross check with their records to ensure their approved auditor number isn’t being used by SMSFs who are not clients.

However, we recognise that this is not enough.

In response to feedback, I’m pleased to announce that at the end of this quarter we will, in three waves, share with our SMSF auditor population the list of funds that have quoted their SAN for the 2017 financial year so they can check for misreporting or misuse.

We will continue to do this annually.

SMSF regulatory contraventions

To protect community and industry confidence in the ATO’s regulation of SMSFs, we have a responsibility to respond when we become aware an SMSF has contravened a regulatory obligation.

Our data shows that approximately 2% of lodging SMSFs are contravening the Superannuation Industry (Supervision) Act (SIS ACT). This low number is terrific, because it means that the vast majority of SMSFs are doing the right thing.

It’s also pleasing that nearly 50% of SMSFs, when advised they’ve contravened regulations self-rectify before lodging their tax return.

However, when trustees operate an SMSF with unrectified regulatory contraventions, they’re placing their fund’s assets at risk.

On average, the most common contraventions involve:

  • loans to members (21.1%)
  • investment in in-house assets (18.7%)
  • failure to keep personal assets separate from the SMSF (2.8%).

We identify these contraventions through ACRs, voluntary disclosures by SMSF trustees or their tax agents or via third-party referrals from a range of sources. We review these reports and investigate the contraventions.

In the 2018 financial year there were 16,909 regulatory contraventions by 8215 SMSFs. Year-to-date we’ve had 8,412 contraventions by 3,549 SMSFs which shows the numbers are steady so far this year.

The graph below illustrates contraventions reported on ACRs for the 2018 financial year by frequency and percentage value, clearly showing the concentration of retirement savings affected in the top 3.

The graph below illustrates contraventions reported on ACRs for the 2018 financial year by frequency and percentage value, clearly showing the concentration of retirement savings affected in the top 3 (all loans, in-house assets and separation of assets).

How have we responded to regulatory contraventions?

We find that the main drivers of regulatory contraventions are financial stress, the desire to grow wealth and to access concessional tax rates and poor record keeping.

How we respond to breaches of superannuation laws or regulations depends on a number of factors including:

  • the nature of the breach
  • the sanctions available under the law and regulations
  • the compliance history of the trustee (and whether or not there have been previous breaches).

Trustee disqualification

The most serious action we can take in response to a breach is to disqualify the trustee. We will do this where we are concerned that allowing the individual to remain as a trustee presents a future compliance risk or risk to retirement savings.

It is one of the ways we protect the integrity of the SMSF sector. A trustee will only be disqualified after other enforcement actions have been considered; it’s a not decision we make lightly.

When we investigate contraventions, we consider the trustee’s attitude to their regulatory obligations and their willingness and ability to operate a complying SMSF. Based on what we find, there are two pathways for trustees. They are to work with us to get back on track or alternatively, to exit the SMSF sector.

For the majority, we aim to help them get back on track. This includes education and helping them establish a plan to fix any unrectified contraventions.  For some trustees though, the best strategy once outstanding contraventions are rectified is to assist them swiftly exit the system.

I want to emphasise that the vast majority of trustees work with us to self-rectify; in fact, nearly all do. Only in the most serious cases do we need to take strong enforcement action.

In the 2018 financial year, excluding directions to educate, of the nearly 17,000 contraventions reported, we only needed to take proactive enforcement action in 180 cases.

If these enforcement actions are inappropriate, for example: the contravention can’t be rectified; the trustee behaves in a manner that reflects a blatant disregard for the law or the trustee seeks to misuse their SMSF to take advantage of the concessional tax rates; then we take our firmest action to disqualify the trustee and/or make the fund non-complying.

In the 2018 financial year, we disqualified 257 trustees (representing 169 SMSFs). So far this financial year, we’ve disqualified 75 trustees representing 53 funds.

It’s pleasing to note that of the total population of SMSFs we regulate, we only had to take pro-active rectification enforcement action for regulatory breaches with fewer than 500 funds. The balance worked with us to voluntarily get back on track.

The following table shows the different actions we took in the 2018 financial year, including the administrative penalties imposed.

The table shows the different actions taken in the 2018 financial year, including the administrative penalties imposed.

SMSF top 100 and tax planning arrangements

Our top 100 SMSF program is focused on identifying aggressive tax planning arrangements within SMSFs, particularly the 100 with the highest asset balances, representing $7.9 billion in assets.

The objective of this program is to provide assurance both to the ATO and to all those who do the right thing, that the ‘top 100’ SMSFs have acquired their assets within the regulatory framework and are appropriately accessing super tax concessions. This program is linked to our Private Wealth area in the ATO.

We have risk-profiled the top 100 SMSFs and identified that 35% warrant a closer look into:

  • use of LRBAs
  • reported contraventions (16%)
  • rapid and excessive asset growth rates (10% over the past four years)
  • non-arm’s length arrangements
  • previously identified risks by our Private Wealth area (13%).

With respect to those funds that had excessive or significant asset growth, our initial findings attribute this to:

  • a property development business being run via the SMSF
  • the use of LRBAs to acquire commercial properties sitting outside the SMSF but within the group
  • revaluation of assets, both listed and unlisted securities.

As this work is ongoing I’m limited as to what I can share. However, I can say that as part of our preliminary assessments of these high risk funds, some have already been subjected to more extensive risk assessment with several identified for escalation to review or audit. In addition, several funds are currently being reviewed or audited as part of our work in the Private Wealth area of the ATO.

I look forward to being able share the outcomes of this work as the program unfolds.

Top 100 SMSF approved auditor program

We also have a program that looks at SMSF approved auditors.

From 2013, the ATO has co-regulated SMSF approved auditors with ASIC. ASIC is responsible for registrations, setting competency standards and, where required, imposing sanctions. The ATO is responsible for monitoring compliance with the auditors’ professional standards.

We rely on approved SMSF auditors to perform an independent and adequate SMSF audit before a fund lodges its annual return.

The auditor is required to provide an opinion on the SMSF’s compliance with regulatory obligations. Approved SMSF auditors have a legislative obligation to provide an independent auditor’s report on their findings to the fund’s trustees, and to report certain contraventions to the ATO via an ACR.

As you would appreciate from my previous comments, some of our other work is heavily dependent on information provided in ACRs.

Reports by SMSF auditors who fail to undertake independent and adequate audits can’t be relied on to provide assurance that SMSFs have complied with their financial and regulatory obligations.

Our top 100 SMSF approved auditors represent 31% of the SMSF population, which equates to about $170 billion in assets.

We focus on this population to provide assurance that almost a third of the SMSF sector is receiving adequate audits.

I’m very happy to report that 20% of the top 100 have been reviewed so far and all have been found to be performing their audits adequately.

High-risk SMSF approved auditor program

Our other key program of work with SMSF approved auditors is our high-risk auditor program. We analyse our data to look for:

  • auditors who complete a high volume of audits but have a very low ACR lodgment rate, which may indicate they’re failing to identify and report contraventions
  • high-volume, low-cost auditors who may be compromising audit quality to keep costs low
  • potential independence breaches.

When we review an SMSF auditor we’ve identified as high risk we look for:

  • poor or outdated knowledge and audit skills
  • poor processes or systems
  • a lack of competence in their role and responsibilities
  • any intentional failure to comply.

Since co-regulation began in 2013, we’ve reviewed 715 high-risk auditors. There are currently about 6,000 approved auditors registered with ASIC.

Our co-regulator relationship with ASIC

Where we find SMSF auditors aren’t performing an adequate audit or not complying with their professional obligations, we refer them to ASIC for consideration.

The number of auditors referred to ASIC has steadily increased over the past three years. I think this reflects the concentration in the market and the difficulty for an SMSF auditor to stay up to date if they only have a few SMSF clients.

Since registration began in 2013, we’ve referred 96 SMSF auditors to ASIC for consideration for further action.

So far this financial year we have referred a further 37auditors to ASIC. In each case we had identified deficiencies in the auditor’s practices or a lack of compliance with their professional obligations.

The auditors were referred for reasons including:

  • failed to comply with auditor independence standards (80%)
  • failed to comply with Australian auditing and assurance standards (67%)
  • registration condition not met (26%)
  • displayed a lack of knowledge of the SISA and/or the SISR (21%)
  • not fit and proper (10%).

As you can see, the most common reason for independence breaches, which can be auditing their own or a relative’s fund or performing other services such that the auditor is at risk of auditing their own work. Reciprocal auditing arrangements have been a recent independence focus for us and we’ve published joint ATO/ASIC guidance on this. Reciprocal auditing arrangements occur where two auditors with their own SMSFs agree to audit each other’s funds.

Where the auditor is also the tax agent, we refer these cases to the TPB. We have referred 25 agents to the TPB, including five this financial year.

Outcomes from cases referred to ASIC

Of those 96 cases we referred, ASIC has reported the following outcomes:

  • 20 auditors were disqualified (20%)
  • 1 auditor was suspended for two years (1%)
  • 25 auditors had conditions imposed (27%)
  • 45 auditors voluntarily cancelled their registration (46%)
  • 5 auditors had their registrations cancelled by ASIC (5%).

Guidance for SMSF auditors following recent court cases

Two recent SMSF auditor cases, Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 and Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502 highlighted the obligations of SMSF auditors when reviewing asset values and investment strategies in SMSFs.

We recently published an article on our website to provide guidance on what is expected of an SMSF auditor in verifying the market values in the SMSF’s accounts and financial statements. This includes obtaining sufficient appropriate evidence to support the trustee’s valuation and the auditor’s reporting requirements.

Monitoring the health of the SMSF system – our baseline monitoring program

The second key area I’d like to talk about today is our baseline monitoring program.

Many of the changes from the 2016 budget came into effect in the 2018 financial year.

As you’d be very aware, these changes have had a significant impact on trustees’ investment decisions and have resulted in wide-ranging changes to reporting obligations from both APRA funds and trustee of SMSFs.

It’s critical for the ATO to be aware of any patterns or trends in how the SMSF sector is reacting and adapting to the super changes, as these may indicate emerging risks.

We’ve established a baseline framework to monitor SMSF behaviour in response to the super reform measures which have made it significantly more difficult to move money into the low-taxed super environment.

The methodology for the framework is generally based on the following approach:

  • a baseline year of 2015-16 (before any of the measures were finalised)
  • a transitional year of 2016-17 (lead-up to 1 July 2017 start date)
  • an outcome year of 2017-18 (first full-year majority of new measures in place).

The intent of the framework is to provide evidence-based insight about the impact of the reform measures on the SMSF sector.

The framework is currently used to monitor key focus areas including:

  • reserves
  • multiple SMSFs
  • transfer balance cap (TBC) compliance
  • LRBAs.

It’s early days – with the 2018 tax returns not yet lodged and a full cycle of transfer balance account reporting (TBAR) still to be completed – however I can share some of our initial findings.


Post-1 July 2017, the rules around TBC and total super balance (TSB), in conjunction with new restrictions on contributions, came into effect making it more difficult to move money into the concessionally taxed super environment.

The use of reserves was an area we identified early that could be open to manipulation to try to circumvent these new rules.  We ran a proactive campaign to flag our concerns and communicate our position on the use of reserves; this included a Regulator Bulletin, articles, emails and presentations like this one.

We expected to start seeing any changes in the use of these strategies in the 2017 financial year, as people restructured their affairs in anticipation of the changes.

As part of our baseline monitoring, we did a stocktake of SMSFs reporting reserves in the 2016 SMSF annual return and analysed the value of reserve amounts.

From the 2016 financial year to the 2017 financial year, we identified:

  • the number of SMSFs with reserves declined from approximately 2,500 to 1,900
  • the total value of reserves declined from approximately $400 m to $375 m
  • the average value of reserves increased from $167,00 to $192,00
  • 690 new reserves were reported totalling approximately $65 m.

We won’t be able to fully assess the impact of the super changes until the 2018 year SARs are lodged in May. Early indications from comparing 2016 with 2017 would suggest there are no significant changes in behaviour around reserves.

We’ve begun investigating the 690 new reserves established in 2017. Our early analysis indicates most of these are likely due to misreporting in prior years and overall the total amount in reserves and number of SMSFs with reserves declined from 2016 to 2017, which is what we would expect to see. At this stage we would therefore assess reserves as low risk.

Out next step will be compare the trend over three years to identify if there are any emerging risks post lodgment of 2018 returns in May.

Multiple SMSFs

Establishing multiple SMSFs was another way we thought people might try to circumvent the new caps. As at late 2018, our data showed there were:

  • 100 individuals with over four SMSFs
  • 473 individuals with three SMSFs
  • 13,057 individuals with two SMSFs.

Early analysis shows no significant increase in the number of people who hold multiple SMSFs over time. We’re currently investigating the 100 people with four or more SMSFs, but our early analysis indicates these appear to have been established for bona fide reasons.

At this stage we would assess multiple SMSFs as low risk.

Out next step will be compare the trend over three years to identify if there are any emerging risks post lodgment of 2018 returns in May.

Transfer balance cap compliance

Overall, it’s been positive to see industry adjusting to event-based reporting for routine TBC cap events. During this first year, we’ve taken an educative and supportive approach where trustees have had difficulties meeting their quarterly reporting obligations. But as delays in reporting may adversely impact the member, we have asked agents to ensure members are aware of this.

We have seen a high level of re-reporting from the sector, particularly in response to determinations and commutation authorities we have issued. Approximately 39% of commutation authorities issued to SMSFs by the ATO have been revoked on receiving amended reporting and we have revoked commutation authorities issued to APRA funds after SMSFs have corrected reporting errors.

To some extent this is to be expected as everyone adjusts to a new reporting regime and we encourage you to correct reporting errors early, at the very least as soon as possible after we’ve issued a determination to your member.

Late correction, especially after we’ve issued a commutation authority to a fund means the individual is at significant risk of having assets unnecessarily removed twice from retirement phase.

We can’t give a fund an extension of time to comply with a commutation authority.

Given the level of re-reporting, I’d like to flag that funds will need to ensure that: their ECPI claims for the 2018 financial year align with this reporting; commutations are properly documented; and any payments to members are correctly characterised.

The roll out of agent access to this information through our on-line services environment has begun and should be complete by the end of March.

Defined-benefit income streams

One area of compliance associated with the TBC that concern us is that 86% of SMSFs that reported paying a capped defined-benefit income stream to a member in the 2018 financial year don’t appear to have met their withholding obligations for those pensions.

Since 1 July 2017, SMSFs have had new PAYG obligations to withhold tax from capped defined- benefit income streams they paid to a member who is:

  • 60 years old or over; or
  • under 60 and the capped defined-benefit income stream is a death-benefit income stream where the deceased was 60 or over when they died.

Even if the amount you need to withhold from these pensions is nil, you still need to provide the individual with a pension payment summary and lodge a PAYG withholding payment summary with us, usually by 14 August following the end of the financial year in which the payment was made.

We use this information to ensure the total income people receive from all these income streams is properly included in their assessable income.

Trustees with these obligations also need to ensure they’re registered for PAYG withholding.

SMSFs who reported paying one of these income streams should review their situation. If they’re concerned they haven’t met their withholding obligations they should:

  • register for PAYG if they haven’t already done so
  • provide the ATO and the member with the payment summary information
  • comply with the withholding obligations on their activity statement.

What are we doing to help?

To assist SMSFs in this position, we’re improving our web content for SMSFs regarding their withholding obligations, to be published shortly.

We’ll also be publishing a Super News article on this topic. If you’re not already on the mailing list, you can subscribe at [email protected].

Finally, we’ll also be writing to funds that are in this position.

What’s next?

As 2019 is a transitional year, we’ve taken an educative and supportive approach. However, we expect re-reporting to decline in the 2020 year as familiarity with the new reporting regime improves.

Accordingly, for the 2020 financial year we’ll follow up funds where a member is prima facie in excess of their TBC and their SMSF re-reports after we’ve issued a determination or a commutation authority, such that no excess remains by:

  • amending the starting value of a pension already reported to us; or
  • reporting a commutation of a pension on the day it started, especially where the amount of the commutation is equal to the excess amount shown in the determination or commutation authority; or
  • removing the pension completely.

Whilst this is a transition year and we expected a degree of re-reporting, the proximity to excess balance determinations and commutation authorities mean we rate this as medium risk.

Out next step is to compare behavioural patterns over three years to determine if there is an emerging risk to be addressed or if the incidence declines as participants become familiar with the new reporting environment.

Concerns about the level of LRBAs by SMSFs

Another area we’re monitoring is the use of LRBAs by SMSFs.

Our analysis tells us that in the 2017 year:

  • LRBA assets of $42.2 b accounted for 5.6% of total SMSF assets
  • borrowings for LRBAs are $24 b, or 3.2% of total SMSF assets
  • real property is the most popular use for LRBAs, with approximately 95% being real property
  • the split between residential and non-residential property is relatively even.

Given the prevalence of property as the main asset purchased under an LRBA, we do have some concerns about the risk to members’ retirement savings in the event of a property decline where this asset represents a significant proportion of an SMSF’s assets. This is referred to as concentration risk.

We’re also particularly concerned that despite the intention of LRBAs to limit recourse by lenders to the asset subject to the loan, in 2017, 30% of borrowers still provided a personal guarantee or other security to the lender.

The final policy landscape regarding the future of LRBAs is yet to be decided, with a number of factors still to play out.

These include the release of the Report of the Council of Financial Regulators on leverage and risk in the super system represented by LRBAs – commissioned in response to the Financial Systems Inquiry recommendation to remove the exception to the general prohibition on direct borrowing for LRBAs by SMSFs and of course, the coming election.

The ATO’s future response will be driven by the outcomes of these events. However, in the interim, the current landscape does suggest an increase in potential risk in the existing SMSF LRBA population.

The risk and impact of poor advice was a key message from the Royal Commission and more specifically it was also highlighted in the recent ASIC report about the rise of ‘SMSF one stop shops’.

We also see ‘on-the-ground’ evidence of individuals setting up SMSFs on the basis of poor or conflicting advice. In this context, we’re conscious of the impact of the changing property market and other investment considerations, such as the use of personal guarantees on SMSF members with LRBAs.

Trustees are legally obliged under SIS Act to consider diversification and liquidity risk as part of their investment strategy and we strongly encourage that where an SMSF has an LRBA, trustees ensure they adequately understand and mitigate the associated risks.

In light of this landscape, our preliminary assessment of LRBA concentration risk for the affected SMSF population is high. However we do recognise that trustees may well have a strategy in place that adequately addresses the risks.

Accordingly, we will continue to closely monitor the characteristics of this sub-population and in order to better ascertain the level of risk we plan to write to all affected SMSFS to ensure they have turned their minds to and appropriately mitigated this risk.

Tools and assistance

I’d like to close by outlining some of the ways in which we’re supporting the SMSF sector.

One of the key things we’re doing is taking a proactive approach to improving the integrity of the sector through improving basic trustee education and increased visibility of disqualified trustees.

I hope that hearing about some of the things we’re seeing highlights the importance of ensuring that trustees understand their obligations and identifying those trustees who should not be part of the sector.

In addition to our observations, recent research conducted by ASIC (Report No. 576 found that about a third of SMSF trustees:

  • found setting up and running an SMSF more costly and time consuming than they had expected
  • didn’t know they needed to have an investment strategy
  • had no arrangement in place if something happened to them.

It’s vital that trustees and their advisers are aware of the responsibilities that come with being an SMSF trustee.

We have a number of strategies to inform and support trustees and advisers to understand what’s required of them under the SISA Regulations, make the right decisions and meet their obligations:

  • we share our views on how the law applies to SMSFs and provide information about areas that are causing us concern via, through newsletters and articles, via emails to industry associations and through formal advice and guidance products such as our Regulators Bulletin and public rulings
  • we encourage SMSF trustees and their advisers to subscribe to the ATO’s SMSF pages and SMSF newsletter to receive updates and information that will help them meet their obligations
  • where our reviews and audits indicate that trustees don’t understand their obligations, we’ll use our powers under sections 159 and 160 of SISA and issue a direction to education to either the trustees or the fund. In 2017-18 we issued 53 directions to educate to funds or trustees of funds. These directions meant that the trustees must undertake one of our approved education courses within a specified timeframe. Approved education courses are listed on

However these tools are passive or reactive, used only after a problem has occurred. So we’re also looking at how we can more proactively encourage trustees to be better informed about their role and obligations.

Importantly, we want ensure that trustees who are applying to register a new SMSF have at least a basic understanding of what’s involved in running an SMSF. This is in line with the Productivity Commission report handed down in January that supports the drive for improved advice and education for SMSF trustees.

Accordingly, as part the existing registration process, we’re planning to include an additional item in the Trustee Declaration to the effect that trustees have familiarised themselves with the basic introductory information and training available on our website (probably in the form of viewing short videos) and have completed an ATO on-line self-assessment to test their understanding of their key obligations.

Improved visibility of disqualified trustees

Another area we are working to support participants in the sector is by helping to more clearly identify trustees who have been disqualified. Professional bodies, on behalf of their members, have expressed their frustration to us about the difficultly in ascertaining if a new client has been previously disqualified by the ATO.

It’s important that advisers, tax agents and auditors can readily identify previously disqualified trustees so they don’t assist these to set up a fund when they are not a fit and proper person to be a trustee.

Disqualifications are currently gazetted but there’s no simple way to search to see if a particular trustee has been disqualified.

As regulator, it is the responsibility of the ATO that wherever possible we assist professionals operating in the SMSF sector in maintaining and protecting its integrity

Accordingly, I am pleased to announce that by the end of this financial year we will publish a searchable register of disqualified trustees on our website.

This register will bring publicly available, but currently fragmented, information into one place. It will list trustees disqualified since 2012 (when the information was first published electronically).


We look forward to continuing our work with the SMSF industry and organisations such as the SMSFA to ensure the integrity of the sector so that trust and confidence in it remains strong.

Whilst each of our respective roles in the sector comes from different perspectives, undoubtedly a common objective for us all is that we want SMSFs to continue to thrive and we want trust and confidence in the credibility of SMSFs as a retirement planning choice to remain strong.

We always welcome the opportunity to participate in events such as this as they promote a clearer understanding of issues that concern the industry and provide a platform for us to engage with and work with you to develop practical, client-based solutions.

Dana Fleming, Assistant Commissioner, Superannuation, ATO