Have you been advised to transfer your super to a self-managed super fund (SMSF)? Perhaps you have been told that you could withdraw your superannuation early, to pay off debt? Either could be a warning sign of an illegitimate scheme through which you could be in line for a fine, face a jail term and risk your entire super.
Here we look at how to avoid such a scheme and what to do if you think you could be caught up in one.
The ATO has warned SMSF trustees to avoid the latest range of retirement planning schemes that deliberately target members who are close to retirement. Such schemes may at first appear legitimate (because they are structured in a way that seems to satisfy certain tax and regulatory rules), but could put members at risk of breaking the law. You might be lured by an offer to access your superannuation early, without concern to the general conditions of release. You could be asked to transfer your super from an existing fund to a self-managed super, resulting in high fees and loss of valuable savings.
ATO Deputy Commissioner James O’Halloran cautioned: “If a taxpayer becomes involved in any illegal arrangement, even by accident, they may incur severe penalties, jeopardise their retirement savings and risk losing their rights as a trustee to manage their own fund.”
If you take part in such a scheme you may also be vulnerable to identity fraud, as it will no doubt involve you handing over your personal details. Such fraud may take years to recover from.
Crucially, setting up an SMSF and knowingly or unwittingly accessing your super early may leave you facing a fine of up to $340,000 and a jail term of up to five years, or fines of up to $1.1m for corporate trustees.
As part of its Super Scheme Smart program, the ATO has released information to highlight the warning signs and risks associated with such contrived schemes (see the ATO Super Scheme Smart webpage at: https://www.ato.gov.au/General/Tax-planning/Tax-avoidance-schemes/Super-Scheme-Smart/).
Latest schemes of concern to ATO
SMSFs and property development
This type of scheme typically involves an SMSF subscribing for units in a unit trust that enters into a joint venture to develop a property on land owned by another entity (often a related party). The development profits may be split 50/50 between the unit trust and the other entity, despite the fact that the initial contribution by the unit trust to the venture represents less than 50 per cent of the total value. This attempts to channel more of the profits to the concessionally taxed super environment and boost the individual’s retirement savings. However, the ATO considers that any eventual income distributed to the SMSF by the unit trust is subject to 45 per cent tax and could result in the ATO revoking the SMSF’s complying fund status.
Granting legal life interest over commercial property to SMSF
This scheme is where the rental income from a commercial property is diverted to the SMSF, which is taxed at lower rates while the individual or related entity retains legal ownership of the property. A typical example will involve a small business owner using a deed to grant a life estate interest over business real property to their SMSF. While the value of the life interest is only a proportion of the property’s value, the SMSF has full access to the commercial property and 100 per cent of the income it generates. The ATO warns that the rental income received by the SMSF may be subject to 45 per cent tax if the amount paid by the SMSF for the life interest is not a fair market value. This could also have implications for the members’ non-concessional contributions cap, pension transfer balance cap, and could breach other rules.
Exceeding the contributions cap to reduce taxable components
Such a situation would arise where an individual deliberately exceeds their non-concessional contributions cap to manipulate taxable and non-taxable components of their superannuation interest upon refund of the excess.
Other suspect arrangements
The ATO is looking at other arrangements regarding the super caps and restrictions that apply from 1 July 2017, including:
- Deliberate use of multiple SMSFs to manipulate tax outcomes, eg, switching each of the respective funds between accumulation and retirement phase; and
- Use of reserves in SMSFs to circumvent the total superannuation balance, which could be legitimate in relation to legacy pensions, although the ATO believes there are limited circumstances where it is appropriate for new reserves to be established in SMSFs.
Blow the whistle or get help?
If you receive an offer in relation to your super that seems too good to be true, or think you may be involved in such a scheme, contact us for advice.