The ATO is currently running a campaign cracking down on super schemes increasingly used by promoters to inappropriately channel money through SMSFs or provide an unfair tax advantage. Some of the schemes highlighted by the ATO would have previously fallen in the tax planning sphere rather than the tax avoidance sphere, but as signalled in the 2022-23 Budget, the government was seeking to commence Budget repair work via tax integrity measures.
“[P]enalties are substantial for those who deliberately get involved in illegal retirement planning schemes. The consequences may be financial through the imposition of higher default taxes and penalties, which will drain [an individual’s] retirement nest egg. Individuals may also lose their right to be a trustee of their own super fund.”
For instance, the ATO has outlined improperly using multiple SMSFs to manipulate tax outcomes as a type of arrangement it is keeping an eye on. This typically involves taxpayers with multiple SMSFs which the ATO notes would not normally create compliance issues, but using multiple funds to “manipulate tax outcomes” such as switching each respective fund between accumulation and retirement phases, will attract its attention.
While it is likely that the ATO is attempting to capture those “manipulating” capital gains in these SMSFs by switching between accumulation and retirement phases, it does not clarify the exact triggers which will attract its attention. Will an individual with multiple SMSFs, that retires and then subsequently unretires, perhaps multiple times, due to simple economics, and thus switches their SMSFs between accumulation and retirement phases, be caught under this renewed scrutiny? It would be unlikely but not out of the realm of possibility.
The other arrangement that was previously in the grey territory is individuals using contribution caps to change up the taxable and non-taxable components of their super account balances. According to the ATO, this involves individuals “deliberately” exceeding their non-concessional contributions cap with a view to manipulating the taxable and non-taxable components of their super account balances. Where again the ATO does not specify what it means by “deliberately”.
Does it involve individuals that continuously exceed their non-concessional contributions caps due to multiple jobs and unfortunate contributions timings by their employers? Does it include those seeking to maximise their non-concessional contribution caps regularly and inadvertently fall afoul? It would entirely depend on how the ATO approaches this and further compliance campaigns in the SMSF space.
Other “schemes” the ATO is closely scrutinising consist of the usual suspects, such as diverting income earned from personal services to an SMSF so that its concessionally taxed or treated as exempt from tax, and limited recourse borrowing arrangements (LRBAs) that are not consistent with a genuine arm’s length dealing. Any SMSFs involved in asset protection schemes which consist of mortgaging SMSF assets to asset protection trusts (or Vestey Trusts) to avoid creditors is also considered to be a compliance risk.
Related-party property development ventures has also been warned by the ATO to take extra care, as these arrangements give rise to significant income tax and super regulatory risks including the potential application of non-arm’s length income (NALI) provisions and breaches of regulatory rules for related-party transactions. SMSFs holding shares in private companies should also be careful to ensure that their actions cannot be interpreted as dividend stripping.
