November 2011 | Edition 26
Update session on Tuesday 15 November 2011 in Melbourne, the Australian Taxation Office (ATO) provided an outline of its income tax compliance objectives in relation to large superannuation funds and highlighted a number of areas that the superannuation industry should consider.
The ATO uses its “Risk Differentiation Framework” (RDF) approach to help it assess tax risks and to determine the allocation of its resources to specific issues.
Under the ATO’s RDF approach, the ATO is applying its resources and tailoring its approach to large superannuation fund compliance. This is based on the ATO’s assessment of the likelihood and consequences of non-compliance with the income tax legislation. Due to the relative size of the superannuation industry, small errors could result in a significant quantum of unpaid tax.
Where appropriate, the ATO may commence compliance sub-projects. The primary objective of these sub-projects is to gain an understanding of the relevant issues and then to identify, scope and deal with risks and issues specific to large superannuation funds.
Overall, the ATO’s intention is to:
- Verify that large superannuation funds are complying with the law and paying the correct amount of income tax
- Understand large superannuation fund tax revenue trends and assist Federal Treasury’s tax revenue forecasts
- Identify and escalate issues and seek to provide clarification of the law where there is uncertainty about the application of that law.
Importantly, apart from direct compliance and enforcement action, the ATO’s broader risk mitigation strategies include:
- Publication of the ATO’s views of the law
- Advice to other areas (and Treasury) on operation of the law
- Administrative guidance products
- Communication with the superannuation industry.
Compliance focus areas
The ATO indicated that its specific superannuation focus areas include:
- Exempt current pension income (ECPI) claims
- Foreign income tax offsets (FITOs)
- Transfer loss rollover relief provisions for fund mergers
- Trust structures and the tax treatment of distributions
- Capital losses being reported
- Taxation of financial arrangements (TOFA)
- Emerging risk areas including:
- Franking credits streaming
- Group life premium deductions
- Post-tax reporting
- Addressing potential unintended consequences of changes to legislation.
Some of the key issues raised by the ATO include:
- Exempt pension income (and the associated deduction adjustments) is a focus area as it represents one of the biggest concessions provided to superannuation funds
- The ATO is reviewing TR 93/17, which provides guidance on the calculation of certain tax deductions for superannuation funds
- Funds should consider such issues as:
- How much reliance they place on their custodian tax reports and whether the reports adequately identify different income components
- Whether the economic fundamentals of the fund align with the tax outcomes
- How fund mergers have been implemented from a tax perspective, particularly where there have been tight time frames involved.
- In 2012, ATO reviews are likely to commence in the following areas:
- Deductibility of insurance premiums particularly temporary and permanent disability (TPD) insurance
- Fund merger transfer loss provisions including cost base transfers
- CGT propagation/optimisation.
Tax risk management and governance in superannuation entities has been a clear focus of the ATO for some time. With the introduction of the RDF and the ATO’s general approach to income tax compliance by large superannuation entities, it is critical for superannuation entities to consider their tax governance and risk frameworks.
- Consider your current tax risk management framework and whether it would withstand any scrutiny by the regulators if they decide to review your tax risk management framework. Deloitte’s SuperCubeTM diagnostic tool can assess the current state of your tax governance/tax risk management framework
- Consider what steps can be taken to strengthen your tax risk management framework, where appropriate
- Consider whether you have focussed on the specific tax issues raised by the ATO adequately
- Review/implement appropriate tax policies on the issues raised by the ATO and any other material items that may affect the position of the fund and your members
- Undertake rolling reviews of the material tax policies of your fund to ensure that they are still appropriate, up-to-date and correctly implemented
- Consider what you will do if your organisation is subject to an ATO or APRA tax review/audit
- Monitor the progress of any ATO announcements and consider the application of these issues to your organisation.