ASF Audits

Update for 2021-22

2. Changes to the Work Test

From 1 July 2020, the requirement to satisfy the work test was abolished for members aged 65 and 66.

What this means is members under age 67 can make all types of contributions without satisfying the work test. The only exception is the downsizer contribution where the work test doesn’t apply and the member must be age 65.

Members aged 67 years or older will need to either satisfy the work test or the work test exemption and provide a signed declaration.

The actual work test itself, and the work test exemption effective from 1 July 2019, have not changed.


3. Property Valuation Expectations

The ATO has updated their valuation guidelines for real property effective for the 2021 financial year. Where an external valuation has become materially inaccurate or a significant event has occurred (such as COVID-19), a new valuation should be obtained, or other evidence provided to support the valuation such as:

• the value of similar properties and recent comparable sales results
• the amount that was recently paid for the property in an arm’s length market
• independent appraisals from a real estate agent (kerbside)
• whether the property has undergone improvements since it was last valued
• for commercial properties, net income yields (not sufficient evidence on their own and only appropriate where tenants are unrelated).

Remember, too, that a kerbside valuation from a real estate agent or an online report must include a list of the comparable sales it relied on to form their opinion.


4. COVID-19 Update

The ATO has provided certainty as to their concessional treatment from the impact of COVID-19 up to the end of the 2021 financial year (as shown in last year’s summary table).

While the ATO has not yet provided any further announcements or guidance for the 2022 financial year, we will continue to take a pragmatic approach to ensure that any impact on SMSF compliance is genuine and as a result of COVID-19


5. Does an asset have to be transferred once the LRBA is paid out?

The simple answer is no. The ATO has released SPR 2014/1, which allows an asset to stay in the name of the holding trust after the LRBA has been paid out.

The caveat is that SMSF trustees must be able to demonstrate the asset was the subject of an LRBA from when the holding trust began to hold the asset until the borrowing was repaid.

To this end, it is critical that all LRBA documentation is kept for as long as the holding trust has title to the asset.

Where a fund is audited the first time and the property is not held in the name of the SMSF trustee we will request, at a minimum, the holding or bare trust deed and the original loan agreement. These documents will ensure that the fund had a previously compliant LRBA and can continue to meet the in- house asset exemption.

The other issue is that replacing the asset with a different asset (even of the same type) will result in the exceptions ceasing to exist, and the LRBA will contravene s67(1) SIS. As a result, where the LRBA is paid out but continues to be held in the holding trust, the asset cannot be subject to improvements that alter it to a different asset. Where the trustees want to change the nature of the asset through development or improvement, they will need to transfer the title back to the SMSF to ensure compliance with SIS.

7. Impact of Six Member Funds

The bill to introduce 6 member SMSFs finally received Royal Assent on 22 June 2021 and is effective from 1 July 2021. The new regulation allows SMSFs to have up to 6 members and requires SMSF advisers to check State or Territory law restrictions before expanding or setting up a new fund.

The reason is that some laws restrict the number of trustees a trust can have. The ATO recommends setting up an SMSF with a corporate trustee and each member a Director of the corporate trustee to avoid this issue.

The ATO is also updating the ABR to make it easier to add more members. While it is recommended to wait for these changes, expected to be completed by mid-August, a paper “Change of Details for Superannuation Entities” form (NAT 3036) can be completed and lodged in the interim. No further action is required if new details are provided in this manner.


8. Changes Superstream for Complying Rollovers

From 1 October 2021 any rollovers to or from an SMSF will need to be processed through SuperStream. To ensure compliance with the new rules, the ATO has stressed the importance of retaining the correct documentation for audit purposes:

• the rollover request was received by the SMSF (which would have come from either the member, the receiving fund or the ATO)
• the rollover was processed through SuperStream (for example, a print-out from Class or BGL); and
• the rollover occurred or was allocated no later than 3 business days after receiving all the information required to process the request

The SuperStream rules requires SMSF trustees to comply with these requirements. It should be noted that failure to provide this information may result in a contravention of the payments standards under r6.17 SISR.


9. NALI – expenditure

The ATO have finalised Law Companion Ruling LCR 2021/2 Non-arm’s length income – expenditure incurred under a non-arm’s length arrangement. LCR 2021/2

The impact of this ruling means that if expenditure is not on arm’s length terms, including general expenses not directly linked to a specific investment, income of the fund may be taxed at the highest marginal tax rate.

“in some instances the non-arm’s length expenditure will have a sufficient nexus to all of the ordinary and/or statutory income derived by the complying superannuation fund. Where the fund incurs non-arm’s length expenditure of this nature, the nexus between the expenditure and all the income derived by the fund is sufficient for all the income to be NALI”

The ATO have stated that no compliance resources will be applied to this prior to 1 July 2022, however the ruling is effective from 1 July 2018.

While NALI is a tax issue and not a SIS compliance issue, this may result in a comment being raised in the management letter if the tax liability has been calculated incorrectly. In the extremely rare cases where the tax liability is materially misstated, Part A of the audit report may also be qualified.