Nick Bruining: ATO puts self-managed super funds on notice over early access, coercive control, illegal loans

With the deadline for many to lodge their self-managed superannuation fund tax returns having passed last Saturday, the taxman has made it clear DIY funds will be a target in the year ahead. The Australian Taxation Office has already revealed there are outstanding issues with more than 93,000 SMSFs. The Australian Securities and Investments Commission is also upping its surveillance activities on advisers who recommend SMSFs to clients. In a speech to the SMSF Association earlier this month, deputy tax commissioner Ben Kelly made it clear a number of risk areas were in the spotlight. These include illegal early access to super, a big surge in prohibited loans from super funds to members, late lodgment and coercive control of SMSF members by other members of the same fund. “For the 2022-23 financial year, we estimated that $252 million was accessed early from SMSFs without a condition of release being met,” Mr Kelly said. For most, a condition of release can only be met once a person reaches the age of 60. While people can access some superannuation money under very limited circumstances — including severe financial hardship and compassionate grounds — the rules are strict, and typically require an ATO authority before the money is accessed. Loans to members from an SMSF fund surged from an estimated $231 million in 2022 to $398m in 2023. The law specifically prohibits loans to members or their relatives, and it can result in big penalties for the trustees of SMSFs who authorise such loans. Mr Kelly said the late lodgment of tax returns and other reports was a reliable indicator there could be other issues associated with the SMSF “In our experience, timely lodgment is generally a marker of a fund operating within tax and regulatory guardrails,” Mr Kelly said. SMSF advisers also have a role to play in ensuring compliance requirements are met and that ASIC, as the financial advice regulator, has made it clear that advisers are also in its crosshairs. In a damning report released late last year, ASIC conducted a review of 100 SMSF client files of selected financial advisers recommending the DIY route. It revealed 62 files failed to demonstrate compliance with the best interests duty, with just over a quarter raising “significant concerns about client detriment relating to recommendations to set up an SMSF”. Coercive control is another area of interest for the ATO. This can occur when a dominant member of an SMSF pressures other members of the fund to do things which might not be in that member’s interests, or illegal. While not definitive, asking members to sign powers of attorney or to sign blank forms can be a warning sign. Under superannuation law, all SMSF members must be trustees of the self-managed fund. That means all SMSF members are equally liable for any issues or contraventions of the fund. SMSFs set up with relatively small amounts can be a risk indicator, and the ATO has taken steps to ensure all members are fully aware of what’s going on. “We also know that SMSFs with balances below $200,000 are the most likely to engage in illegal early access, with just over 80 per cent of all cases coming from this group,” Mr Kelly said. There’s a good chance that members of an SMSF with less than this amount will receive a call from the ATO. “If we discover during the registration process a trustee is unaware of the fund, we can wind up the SMSF,” Mr Kelly said. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association