Why is lodging an SMSF’s annual return on time so important – particularly in the first year?

Most of us are used to trying to meet deadlines to the Australian Taxation Office – simply because the prospect of being chased for tax by a regulator with deep pockets and significant enforcement power makes that feel like the safest course.

But why is doing this particularly important for SMSFs? And even more so for SMSFs in their first year of operation?

To answer this question, there’s a little context needed.

For a start, the ATO has a dual role when it comes to SMSFs – it is the compliance regulator as well as the tax collector. That’s quite different to personal tax returns, company tax returns etc where the ATO’s main function is to make sure we pay the right amount of tax at the right time.

Its role as the compliance regulator means the ATO is very focused on whether each and every fund is following the superannuation rules, not just the tax ones. Of course they rely on others like SMSF auditors to help them and auditors have a comprehensive set of requirements when it comes to reporting non-compliance to the ATO.

But both the auditors and the ATO get the information they need to make sure the rules are being followed as part of – you guessed it – the annual return process.

So when a fund doesn’t get an audit completed or submit its return, the ATO is flying blind.

The fund might be doing all the right things (except meeting its deadlines!) but the regulator has nothing to suggest that’s the case. Not surprisingly, they have to assume the worst. Late lodgement is therefore a little like the canary in the coalmine – it tells the ATO there’s potentially a problem.

And it’s an effective canary. In my experience, when trustees of an SMSF have really done something wrong, the very first thing they do is stop lodging returns. And while that might feel like the best thing to do (the SMSF equivalent of hiding under the doona), it generally backfires. Not surprisingly, a regulator that has to chase a trustee to fulfil their lodgement obligations is pretty cranky by the time they get it.

The chance of leniency is considerably less than if the trustee had ’fessed up quickly.

These days the ATO has a number of tools in its armoury to turn the screws on late lodging trustees. Of course, penalties can be imposed – but that will come last when the return is eventually lodged. But in the meantime, the ATO can (and does) remove the fund from an important register known as “Super Fund Lookup” as soon as their return is late. Funds that are removed from that register can’t receive rollovers from other funds and employers often won’t pay contributions to funds in this position either. Both behaviours make complete sense – funds and employers have to make sure the fund they are moving money to under these circumstances are “complying superannuation funds”. The only way they know if that’s the case is if the fund is listed as “registered” or “complying” on the Super Fund Lookup register.

Funds that lodge late in one year have a much shorter deadline the next year. For example, SMSFs with tax agents can usually lodge their 2021/22 annual return any time up to 15 May 2023. But any fund that lodged their 2020/21 late without being given an extension has a much earlier deadline for their 2021/22 return – 31 October 2022.

Even auditors have ways to deal with trustees who won’t give them the information they need. For example, SMSF auditors who find a compliance breach (or even just suspect that one might have occurred) have a legal obligation to tell the ATO even if they don’t end up completing the audit. That’s deliberate. It means that a fund can’t switch auditors just because the first one has found a problem. In fact, changing auditors at that point is very much something that would make an auditor suspicious and feel they had to report their concerns to the regulator.

It's also illegal for a trustee to take too long to respond to an auditor’s request for information.

This is one area where simply sitting on your hands won’t work.

Given that the annual return is the ATO’s window into what’s happening in all these SMSFs they’re responsible for regulating, it’s not at all surprising that the first return for a brand new fund is even more important. The general view at the ATO (and I’d agree with this) is that people generally start off as they mean to go on. Trustees that do the wrong thing (for example, take money out of their SMSF when they shouldn’t) often do it in the very first year.

Not surprisingly, first year funds have an earlier deadline. For example any fund established in 2021/22 must lodge their first return by 28 February 2023 rather than 15 May 2023.

They also get much more scrutiny from the ATO if they are late.

All in all, while deadlines are always important, some are more important than others. This extra context explains why this particular deadline – the SMSF annual return – is even more important than a normal tax return.

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