Following commencement on 1 July 2017 of the most extensive changes to Australia’s superannuation rules in a decade, the Australian Tax Office are introducing onerous new event-based reporting requirements which will affect every SMSF from 1 July 2018. Trustees must ensure they are ready for the new rules or risk penalties.
What are the new reporting requirements?
The new reporting requirements are being introduced to allow the ATO to administer the new $1.6 million transfer balance cap (‘TBC’) which came into effect on 1 July 2017 and restricts the amount of tax-free superannuation benefits an individual is permitted in their lifetime.
The reporting requirements, referred to as the transfer balance account report (‘TBAR’) rules, require that certain member events be reported to the ATO in real time i.e. as they occur, as opposed to after year-end. The relevant events are:
- Commencement of most pensions
- Certain Limited Recourse Borrowing Arrangement (‘LRBA’) payments
- Member pension commutations (cashing in some or all of a pension)
- If a pension stops being in ‘retirement phase’
- Compliance with an ATO ‘commutation authority’
- Personal injury (structured settlement) contributions
The first three events listed above are likely to arise most often for SMSFs.
Who do they affect?
Although the Government has previously announced that less than 1% of Australians with a superannuation account will be affected by the $1.6 million cap measure, the ATO has chosen to impose reporting obligations on every superannuation fund in Australia, including all SMSFs, even where they may not have affected members.
What penalties will apply?
There is no specific penalty regime in place with respect to TBAR, therefore ordinary failure to lodge (‘FTL’) penalties will be applied by the ATO if trustees do not lodge their reports on time. At present, the ATO can charge up to 5 penalty units (1 unit per 28 days) for any return or statement that is lodged late (higher for larger entities though this is unlikely to affect most SMSFs). A penalty unit is currently $210, therefore the maximum FTL penalty is $1,050 per event.
It is our view that these new reporting obligations, as currently proposed, are unreasonably onerous and will increase the costs of operating an SMSF. This will be the case whether or not reports are lodged, as advisers must review their SMSF client information on a more regular basis for potential real time reportable events.
These measures are currently the subject of lobbying efforts by major professional bodies in the hope that the ATO can be convinced these measures should not apply, or should apply in a more limited fashion, to SMSFs. Ideally, SMSFs which do not have affected members, and do not have the resources of large industry and retail superannuation funds, would receive concessional treatment.
One of the difficulties involved in real time reporting for SMSFs is that they are generally only able to work out values, such as the starting value of a pension, in retrospect and only once the financial accounts have been prepared. At present there are a variety of proposals being suggested by the professional bodies and considered by the ATO.
Where to from here?
In a recent position paper, the ATO outlined two possible concessions they are considering for SMSFs:
- from 1 July 2018 SMSFs will be required to report events occurring in relation to their members' transfer balance account 10 business days after the end of the month in which the relevant event occurs (subject to exemptions); or
- from 1 July 2018 SMSFs will have 28 days after the end of the relevant quarter to report all TBC events (subject to exemptions).
The Tax Institute of Australia has suggested an alternative approach – that all SMSFs with members with a balance of $1 million (or less) should be provided with a permanent exemption (for the period that the balances remain at $1 million or below) from these reporting requirements.
We are hopeful that the ATO and industry will agree a sensible compromise, well before the scheduled start date of 1 July 2018, and SMSFs will not be unduly affected by these new requirements. We will advise our SMSF clients of any major developments.
If you would like to discuss any aspect in more detail, or understand how they might apply in your circumstances, please contact Aaron Fitchett of our office on (03) 9851 9000.
Aaron is the tax partner at Baumgartners. He is a Chartered Tax Adviser with 18 years’ experience advising private and corporate clients on a wide range of tax and commercial matters. Aaron also represents clients in disputes with the Australian Tax Office and state revenue authorities. Aaron holds a Master of Taxation from UNSW and is an active member of the Taxation Institute of Australia.