Wednesday, 11 September 2019
Questions without Notice
My question is to the Minister for Finance, representing the Assistant Treasurer, Senator Cormann. In a recent column titled 'Tax office threat to self-managed super funds', Robert Gottliebsen raises concerns about the ATO's latest campaign to investigate SMSFs. Gottliebsen wrote that the ATO has sent letters to almost 20,000 of these funds saying:
Our records indicate that your … investment strategy may hold 90 per cent or more of its funds in one asset, or a single asset class—
such as property. The ATO states that this may not meet the diversification requirement and the superannuation industry regulations, risking an administrative penalty of $4,200. They then demand that a detailed investment strategy be provided to allay the ATO's concerns. Minister, how has the ATO selected these SMSFs for investigation? What is the basis of the 'no more than 90 per cent of funds in one asset or single asset class' diversification requirement, and where is this fixed percentage of 90 per cent found in the superannuation law or regulation?
I thank Senator Bernardi for that question. As the regulator for self-managed super funds, the ATO has responsibility to ensure that trustees comply with their obligations and the super laws, one of which is to have an investment strategy that has given due consideration to a number of risks, including the risk of inadequate diversification. The action referred to in the article relates to recent ATO correspondence in writing to approximately three per cent of SMSF trustees and their auditors who had invested 90 per cent or more in a single asset or asset class and had used a limited-recourse borrowing arrangement to acquire that asset.
The ATO's intention was to raise awareness of investment strategy obligations. The ATO focused on this group following concerns raised in a report by the Council of Financial Regulators and the ATO to government in relation to leverage and risk in the superannuation system in February this year. This report highlighted concerns that less diversified self-managed super funds with limited-recourse borrowing arrangements are exposed to asset concentration risk which, in the event of a fall in the asset price, could lead to a significant loss in the value of the fund. But the ATO's records show that these SMSFs may hold 90 per cent or more of funds in one asset or a single asset class, and as regulator for SMSFs the ATO thought it appropriate to raise awareness of the investment strategy obligations. I can advise the Senate that the ATO did not demand that a detailed investment strategy be provided to the ATO. The letter simply requested that trustees review their investment strategy.
Thank you, Minister. I'm heartened by your assurance that a detailed investment strategy was not demanded, contrary to the article. But many SMSFs are set up to hold primarily the real estate assets that fund members operate their businesses from. These business owners do not have the time or resources to respond to fishing expeditions or heavy-handed bureaucratic letters like this one from the ATO. Minister, when making these requests of SMSFs, what oversight do you provide, or does the government provide, to the ATO?
As I said in my primary answer, the ATO is the regulator, obviously, and acts independently as an independent statutory agency. The ATO has responsibility to ensure trustees comply with their obligations and the super laws, and one of those laws requires super fund trustees to have an investment strategy in place that has given due consideration to a number of risks, including the risk of inadequate diversification.
The government support giving retirees and those planning for their retirement the choice about whether to invest in a commercial fund or an industry fund or manage their own investments via an SMSF investment vehicle. But, as I noted before, the ATO has not requested any additional reporting. It is a requirement under the super laws that all SMSF trustees must have an investment strategy that considers diversification risk, which auditors review annually as part of the annual audit. The letter from the ATO is a part of the ATO's campaign to assist SMSFs in meeting their regulatory obligations and protecting their superannuation. In addition, the ATO— (Time expired)
Minister, I raised in Senate estimates last October further evidence of the ATO's heavy-handed regulation of SMSFs, and the commissioner undertook to revisit the ATO's program of establishment queries and, not knowing when it was last reviewed, undertook to 'look at the process to make sure it's fit and proper, as the ATO don't want people thinking this is somehow an inquisition of them'. Minister, this latest action by the ATO makes many in SMSFs feel like there is an inquisition. Has the ATO review been done? If so, what were its key findings and how will they affect ATO practices and SMSF red tape going forward?
Thank you very much, Senator Bernardi, for that supplementary. In relation to the review that was previously requested by Senator Bernardi, I can advise that, in February 2018, the ATO completed an internal review of the 'secure front door' program. The ATO revisited this review in October 2018, following questions raised by Senator Bernardi at the October 2018 budget estimates. In November 2018 the ATO undertook further consultation on the 'secure front door' process with the Tax Practitioner Stewardship Group. The Tax Practitioner Stewardship Group were supportive of the current process and felt there was no need to ensure an alternative engagement regime.
The ATO also reviewed its audit processes and supporting guidance material for staff, as well as analysing closed cases, requests for reviews of decisions and complaints. The ATO found no systemic issues, I'm advised, or deficiencies in the ATO's operational processes, including client interactions. There were no formal complaints regarding the conduct of SMSF registration interviews. The initial review and the ATO's subsequent reconsideration of the 'secure front door' case selection and audit processes subsequently found them fit for purpose.