The ATO has published a draft Practice Statement Law Administration (PS LA) affirming its position with regard to exercising discretionary powers when individuals access their superannuation benefits early without satisfying a condition of release.
The statement, PS LA 2021/D3 Superannuation – Commissioner’s discretion where members receive benefits in breach of legislative requirements, sets out when and how the regulator will intervene to ensure super benefits accessed in contravention of the law escape mandatory penalties.
Typically, Division 304 of the Income Tax Assessment Act 1997 requires a superannuation benefit paid to a member who has not satisfied a condition of release to be included in the person’s assessable income so it will be taxed at the applicable marginal tax rate.
According to PS LA 2021/D3, the basic premise the commissioner should take into account when considering the use of the available discretionary powers is if it would be unreasonable for the superannuation benefit to be included in the individual’s assessable income.
In particular, it is stipulated the commissioner must reflect upon the type of superannuation fund from which the benefit has been paid, effectively separating SMSFs from Australian Prudential Regulation Authority-regulated funds.
The SMSF Association has noted the differential treatment and has alerted practitioners to this fact.
“This draft practice statement clearly sets a much higher standard for SMSFs, where members/trustees effectively control the amount and timing of all benefit payments. SMSF trustees are expected to present a set of circumstances that clearly demonstrate factors genuinely beyond the control of the recipient, at the time of the payment, to satisfy the commissioner to exercise his discretion, such as a bank error,” the industry body noted.
In addition, the draft practice statement confirmed situations where the commissioner will not contemplate using these discretionary powers, including if the person was suffering financial hardship or distress, if the payment was made in error and rectification has been attempted, if the person has been disqualified from being a superannuation trustee, and if the standard tax consequences associated with these situations are undesirable to the member or difficult for them to meet.
The ATO is seeking industry consultation on the draft practice statement, with submissions able to be made up to 4 February 2022.