ATO targets six key areas

How do I do that? The obvious answer is to understand your obligations as a trustee and make sure you operate within the rules. But you can also get a hint of where you're likely to run into problems from the Tax Office's annual compliance plan. This year's plan will focus on six key areas in relation to self-managed funds, so ticking off your compliance in these areas should be a top priority

What are the six areas? The Tax Office is still concerned about illegal early release schemes that help people get their hands on their super before they're entitled to. These schemes often involve setting up a self-managed fund and transferring super from other funds into it. The promoters will often charge a hefty fee to transfer money across and try to convince you that once it's in the fund, you can withdraw it at will.

That's not the case. Your money is still locked up until retirement and you can access it earlier only in limited circumstances. If you withdraw it, you will be taxed on it as income and both your fund and the trustees face hefty penalties.

As part of its crackdown on these schemes, the Tax Office is reviewing the registration of all new self-managed funds to make sure they're legit. It is also focusing on funds lodging their first annual return to make sure they're meeting all the rules and are entitled to receive their notice of compliance.

Another area attracting the Tax Office's attention is auditor contravention reports. Most trustees will be aware that one of the requirements is that self-managed funds are audited each year. If your fund has not met its legal requirements, the auditor is obliged to notify the Tax Office. The office has also been undertaking compliance work to ensure auditors are doing their job.

This year it will undertake 300 audits and 600 reviews of fund auditors - almost 50 per cent more than last year.

In a speech to the Institute of Chartered Accountants of Australia's self-managed fund conference, assistant commissioner for superannuation Stuart Forsyth said the Tax Office would focus on high-risk auditors, such as those where it found significant contraventions had not been identified, where there was little or no evidence of an audit being maintained, or where there were serious breaches of the independence requirements.

For many funds, the biggest danger lies in related-party transactions, which will also be under the spotlight. Super funds, for example, are prohibited from lending money to members and so-called "in-house assets" (such as loans to or investments in related parties) cannot make up more than 5 per cent of assets.

The other two focus areas are the reporting of exempt current pension income and non-arm's length income and the re-reporting of contributions and compliance with the excess-contributions tax regime.

Which means? Let's start with pension income since Forsyth says this represents 83 per cent of total self-managed fund tax deductions.

While ordinary super funds pay 15 per cent tax on their earnings, once a fund enters pension phase its earnings are exempt from tax. But if your fund has, say, two members and only one is receiving a pension, the fund will have to segregate certain assets specifically for the purpose of paying the pension or adopt a proportional approach which requires an actuarial certificate.

Forsyth says a self-managed fund's assets must also be revalued to their current market value before starting the pension, and trustees need to ensure the minimum required pension payment is made.

He says the legislation also sets out four types of non arm's-length income for funds, such as income from discretionary trusts. This must be identified correctly on tax returns as it could receive different tax treatment to the fund's other income.

With more than 70,000 excess-contributions tax assessments likely to be issued this year, the Tax Office will keep a close eye on how funds report contributions and comply with the tax, he says.