Trustees who have accidentally triggered illegal early access to their retirement savings should not seek to hide the mistake by calling it a loan from their SMSF, which will only create more problems for them, according to two technical experts.
Heffron client relationship manager Sean Johnston said it was possible to mistakenly withdraw funds, but the ability to fix that action would depend on the intention of the SMSF member.
“The way I would approach a claim of accidental illegal early access is to ask what kind of mistake was made. If someone meant to use a family trust bank account to transfer some money, but accidentally used the SMSF’s bank account, that falls within the scope of a genuine error,” Johnston said during a webinar today.
“Those sorts of honest mistakes you can fix, but if the intention was actually to make a withdrawal and you got the condition of release wrong or didn’t know you were not eligible to take that money, you can’t fix that by putting the money back in.”
Adding to his comments, Heffron SMSF technical and education services director Leigh Mansell said the outcomes for a member of an intentional illegal early withdrawal did not change anything and efforts to disguise the withdrawal as a loan were easy to identify.
“The fact that they might not like the consequences doesn’t matter as it is all about the intention and following through, and if that is what they did, it is a benefit payment and there is no mechanism to rectify it by sticking it back in,” Mansell said.
“We do see a lot of people treating illegal early payments as loans because at the end of the day the client doesn’t like the consequences.
“The hiccup with treating these payments as a loan is that there should be two critical features [in a loan from an SMSF].
“There has to be a temporary transfer of money – that is the first feature – and the second is there must be an intention to repay the money.
“Often when we are dealing with somebody who has taken money out of their fund, at the time they took it, they didn’t have an intention to repay.
“So dressing it up as a loan after the fact won’t cut it because at the moment that money left the fund, there was no intention to repay.
“If you are trying to dress things up as a loan, we would recommend you don’t go there.
“Just go down the route of declaring you took it out when you weren’t supposed to and face the tax consequences of this and report it in the supplementary section of your personal return at question number 24, as it is essentially other income and that’s a trigger for the ATO to tax that normally.”
