Be prepared or risk SMSF tax trouble
If there’s one thing entrepreneurs hate, it’s a run-in with the tax man.
And while the nation’s keeper of the coffers may play nice most of the time, make no mistake – the ATO can be ruthless in clawing back money.
With a budget coming up short, the government is looking to some new places to find some cash – like self-managed superannuation funds.
It’s no wonder – about half of all funds have more than $1 million dollars. It’s a gold mine.
As a result, it’s a good idea to keep an eye on your fund and its tax activities. After all, with the government looking for extra cash, you can expect the ATO to ramp up its scrutiny – and you don’t want to be in the firing line.
While there are no new laws specifically targeting SMSFs (yet), now isn’t a good time to draw the attention of the ATO.
A tax disaster could have a big impact on your retirement plans – now is the time to be vigilant.
At the recent Self-Managed Superannuation Professionals’ Association annual conference in Melbourne, Small Myers Hughes partner David Hughes outlined a number of methods to avoid tax disaster.
“It’s important to look at recent ATO activity,” he said at the conference.
“There is a fairly interesting and significant involvement in the ATO of hands-on regulation of the self-managed super sector.
“In 2011-12 there were a larger number of excess contribution cases…raising approximately $175 million in assessments.”
Pay attention – here are five key things you need to know to avoid disaster if you find yourself in trouble with the ATO.
1. The way you present evidence is just as important as the evidence itself
It’s clear the ATO is a pretty mean machine. During the 2011-12 year, the taxpayer only won one ruling.
But there is some relief. Hughes says if you run into trouble with the ATO, the way you present yourself can help your case.
“This seems to be a common thread in these decisions, in that how you present your evidence can very much dictate the outcome of a case,” he says.
“You can have cases that are similar but one will win, and the other will lose, and I would suggest it’s the evidence that is presented and how it’s accepted that is key to how that case is determined.”
Don’t believe it? Check out some rulings.
The Dowling AATA49 case this year contains a comment from the tribunal member hearing the case that two specific witnesses were in fact “witnesses of truth” – a phrase Hughes says is important to note.
Another case, which involved a fund making a loan to a related company which represented more than 5% of the market value of the assets, also came with some commentary.
Hughes says in the ruling – which was positive – the fund in question had “no history of non-compliance”.
“…and there is evidence, which has not been contradicted, that the Fund was made compliant in June 2010”.
Hughes says both these phrases are significant, as they indicate the tribunal took into account the method by which evidence was presented.
“Evidence, evidence, evidence,” he says. “How you present your evidence to the court is critical.”
“I’ve seen so many cases that could have been won with better presentation.”
2. Get some answers
Similar to the last tip, the ATO doesn’t particularly like it when you haven’t got an excuse for something – small slip-up or not, the tax man wants to see an answer.
A good example: In the Dowling case, a Dymocks executive moved $91,000 to her superannuation account. But due to some mix-ups with the payroll officer, the money didn’t go into her account until July.
There were plenty of problems with the case. But one involved the fact someone had logged into Dowling’s superannuation account between when she had moved the money, and when it was finally cleared – and no one could explain why. Not even Dowling.
The ATO didn’t like this, and Hughes suggests it may have contributed to the outcome of the case.
“How you explain a particular piece of evidence that may be bad for you is critical to the impression the tribunal forms,” he says.
“If the evidence had played differently, she might have had a different outcome.”
3. The court doesn’t care about your excuses
It shouldn’t need repeating, and this goes for every type of ATO case and not just self-managed super funds, but the tax man just doesn’t care about your excuses.
The ATO will allow some things like excessive contribution to fall by the wayside if you can explain you fall into “special circumstances”.
But those instances are far and few between. Look at some of the excuses people have used to try and get out of excess contribution taxes:
- “I made a mistake” – Rinaldo [AATA 839]
- “I told the bank to make the transfer, it’s not my fault” – Colless [AATA 441]
- “Because I changed jobs” – Naude [AATA 130]
- “I didn’t know my employer had already contributed” – Paget [AATA 334]
There is one particularly sad case, [Tran AATA 123], in which someone put $450,000 in their superannuation fund.
The ATO replied by saying the person should have obtained financial advice. “I’d prefer not to be in court, I’d rather be giving you financial advice up front. If you’re a financial planner you should know what you’re talking about. Quite often these cases come about because people are ignorant,” Hughes says.
4. You have to actually make an effort
If you’ve made a mistake but then haven’t tried to correct that mistake, the ATO is going to become very annoyed.
In the Bornstein AATA 424 case, a taxpayer spent a substantial amount of time overseas during the 2006-07 financial years.
He was the employee and sole director of a company, and made regulator contributions into his super account.
He emailed his accountant while overseas, but received no response.
After checking the ATO website, he saw that he was able to pay himself within 28 days into the new year under the superannuation guarantee.
However, that rule related to a completely different set of circumstances, and his contributions resulted in a tax charge.
But the case didn’t end there. Because the person in question was able to show the ATO he had tried to contact his accountant, and had relied on instructions provided by the ATO website, he was able to get off the hook.
“While I would not ordinarily accept a mere misunderstanding of one’s obligations is enough to constitute special circumstances, there was what might be described as a ‘perfect storm’ of events, miscommunications and misunderstandings that combined to leave the taxpayer in an unusual and unfortunate position,” the judgment read.
Hughes says this is a significant case – the fact Bornstein actually went out of his way to find instructions and didn’t just do whatever he wanted is a key point.
“If he hadn’t checked the website, he may not have won,” says Hughes.
5. Ignorance is no excuse!
Here’s an interesting one. In a 2008 case, a lawyer operating an SMSF fund used superannuation money to prop up his law firm, which is using the super fund as a type of “last resort”.
Obviously, the ATO doesn’t like this very much and moved to find the fund non-compliant.
However, the case is interesting because a trustee said she had no idea what was going on.
Therefore, the trustee argued, there should be some leniency.
But Hughes says the ATO was “particularly scathing” of that approach.
“Directors must make their own enquiries and independent assessment of that information or advice,” it said in the ruling.
“As acknowledged by the Commissioner, the ATO does have a role in educating taxpayers and trustees of self-managed superannuation funds about taxation and superannuation laws, but does not have an obligation, as submitted by the applicant, to ensure trustees understand and comply with the law.”
“In my view, the primary responsibility for this obligation resides with trustees and if the trustee is a corporate trustee, those who manage them.”
The message is clear: ignorance is no excuse.
This article originally appeared on SmartCompany.
