SMSF Administration & Compliance

SMSF administration can be difficult. SMSF compliance more so. This paper covers the combined functions of administration and compliance.

An administrator will often hear a trustee or adviser say “The investment records are in order so there’s not much for you to do.” This attitude is widespread and relegates the administration process to the category of a low value annoyance. On the contrary the SMSF administration process, particularly when it involves a proactive compliance approach, can provide significant value added benefits. Done poorly it can significantly detract from the benefits inherent in the SMSF structure.

At a very basic level an administrator must take the investment portfolio and incorporate several overlays. Each investment portfolio asset and transaction must be allocated to a member account or reserve. Each member account and reserve must be valued taking into account deferred tax liabilities and credits – the some total of all member accounts will almost never equal the value of the investment portfolio. The tax components of each member’s account or superannuation interest must be maintained. The preservation components of each member must then overlay their single or multiple accounts as preservation does not attach uniquely to each member’s superannuation interest in the manner of the tax components. If a compliance service is also being provided within the administration umbrella then the responsibilities and duties required are significantly magnified.

SMSF administration is the mechanical process of recording what has happened. SMSF compliance moves to a higher level and examines what has happened and will happen in light of the SMSF rules. It also involves examining what is planned in the future rather than dwelling only on the past.

SMSF administration only services are generally carried out at year end. By this time it is difficult to introduce a compliance overlay as it’s generally too late to fix items without a breach notice. Compliance in this scenario is reduced to trying to hammer square pegs into round holes as reasons are formulated to justify what has occurred or how to fix the problems that have been revealed. This will often involve a breach notice from the auditor and an undertaking for rectification.

Let’s consider a few basics.

The SMSF administration process should ensure that Fund lodgement dates are achieved. Lodgement dates are the dates by which the Annual Return is to be lodged with the regulator. This combines the tax return, financial statements and member contribution statements of previous years.

SMSFs are self assessing so the tax payment will generally be made at the time of lodgement. If the Fund returns have been completed early and you do not wish to pay the tax bill yet then hold onto them until the lodgement date.

Lodgement dates can be difficult to achieve when tax statements are required from managed funds or, worse, from wrap accounts.  In the past, extensions to the lodgement dates has been relatively easy to achieve where the administrator has a good record of on-time lodgement. Extensions are becoming more difficult to obtain as the ATO tighten the controls on SMSFs.

The new administrative penalty regime which applies now has the potential to financially cripple smaller accounting firms that do not lodge on time. Where a Fund is late lodged the penalty is $110 for every 28 days or part thereof up to a maximum of $550. In addition, where there is tax outstanding, the ATO can impose a penalty of up to 25% of the tax. Clearly a Fund where members are making large concessional contributions can be the source of considerable pain when lodgement dates are missed.

In addition a penalty of up to $2,200 may be applied for “significant” false or misleading statements made on an approved form. There are far more significant penalties, up to 5 years jail and $220,000, but these are largely related to compliance. They do, however, underline the importance of the SMSF compliance, rather than SMSF administration, overlay.

Delays can also occur due to the time it takes for members to confirm the deductible nature of any contributions. Members sometimes wish to change their decision after advice from their accountants. This is a particular problem if the change is notified after the returns have been completed. The Annual Return contains the information that the ATO uses to monitor any breaches of the contribution caps, determine co-contribution amounts (in conjunction with the member’s personal tax return details) and to determine how much of a member’s contributions can be split with their spouse.

SMSF administration problems are generally encountered where there is asset or account segregation. The need for segregation is widely misunderstood. Segregation is a word that has different meanings depending on its context.

Trustees and their advisers need to be aware that SMSF administrators process many funds in addition to theirs. Unlike the ASIC company register there is no such registration requirement for SMSF names. This means that there are numerous Funds with the same name. This can be confusing and cause processing and filing errors. When choosing a Fund name it is advisable to attempt to be unique. E.g. Robyn and Joseph Smith Family Retirement Fund is preferable to Smith Super Fund. You should also avoid the use of “The” or The Robyn and Joseph Smith Family Retirement Fund will be listed alphabetically under “T” in most systems including that of the ATO. If you have a corporate trustee you should try to make it a similar name to the Fund e.g. Robyn and Joseph Smith Family Retirement Fund Pty Ltd.

Tranzact Super provides comprehensive services covering both SMSF administration and SMSF compliance.