Smarter SMSF CEO Aaron Dunn said that, from a risk point of view, the ATO is clearly upping the ante and placing increased scrutiny when looking at these arrangements.

“Be prepared for some form of ATO review or audit in particular where property development is involved and you’ve got these different transactions going on,” Mr Dunn said at the Smarter SMSF Virtual Day.

“There is coming greater scrutiny through auditors as well, so making sure everything is done 100 per cent is crucial, whether it’s your paperwork, your arm’s length dealings, and always documenting decisions.

“Make sure you’re also managing your funding and liquidity risks in particular where the contribution rules and the tightening of those caps will play a role there.” 

From an investment risk perspective, Mr Dunn said there needs to be greater considerations in terms of the inherent nature of risks in diversification requirements and investment strategies and how to overcome that through heavier asset concentration with single asset classes.

This also includes risks when winding up those arrangements and the use of any intermediate developers as well and the role they’re playing in that process, too.

“The ATO has mentioned its focus on arrangements where you might be undertaking outcomes that are deliberately undervaluing assets and are ultimately manipulating the member’s transfer balance account, therefore entering into retirement phase and allowing for a greater amount to be exempt on a tax earnings basis,” Mr Dunn said.

“They have also seen a number of transactions that have been poorly documented in particular around the use of LRBAs and/or other funding arrangements that involve related parties.

“Make sure you’re looking at how a fund may be in breach of those provisions and what steps may need to be taken to try and comply if you can, or otherwise any steps to exit out of the arrangement as well.”

Mr Dunn said the ATO is going to continue to monitor development activities, particularly LRBAs and related party transactions, to ensure that they’re not contravening any of those key risk areas.

“So, for trustees, what they should be doing is they should obviously be seeking advice from you and get as much advice as they can and understand what they’re entering into,” he said.

“The last thing you want to do is going into forced sales of assets or having to obviously wind up the fund as well. So, in some cases, you’re better off getting guidance up front rather than asking for permission at the end.

“Getting your private rulings rather than going into voluntary undertakings is a far better approach in my view, so spend the time with your clients up front there as well.”