A technical manager has confirmed the ATO to date has said it will not speculate on what may or may not happen in the future within an SMSF when looking at whether to apply the anti-avoidance rules regarding income tax contained in Part IVA of the Income Tax Assessment Act.
According to Colonial First State head of technical services Craig Day, the regulator has taken this position with regard to withdrawal and recontribution strategies that result in the commencement of tax-free account-based pensions aimed at providing non-taxable payments to death benefit recipients such as adult children.
The ATO’s approach to the situation was enunciated when Colonial First State applied for a private binding ruling on one of these strategies several years ago and cleared both the SMSF member and the parties to whom any death benefits would be paid.
“[When looking at the beneficiaries, the ATO] said potentially there is a tax benefit there but we would need to know all the facts and circumstances with reasonable certainty and the tax benefit here that is going to accrue, potentially to the beneficiaries, is dependent on a whole bunch of things happening which may not happen,” Day told delegates at the recent SMSF Association Technical Summit 2022 held on the Gold Coast.
“[For example] whether the death benefit actually goes to the kids. What happens if the person dies and the death benefits go to the spouse? Or [what if] by the time the member dies they’ve fully exhausted their account-based pension?
“So they said we wouldn’t rule on that anyway and go and look at our comments from the NTLG (National Tax Liaison Group) [meeting] in 2007, that is, we’re not going to apply Part IVA to this situation.”
According to Day, the amendments to the work test rules may make these strategies more common and give individuals eight more years to eliminate taxable components in their super funds through the use of withdrawal and recontribution strategies, and this may give the regulator a reason to review its position.
“So if we get a lot of people all of a sudden coming out and doing this, maybe the ATO will come back and have a look at it,” he said.
To this end, he recommended what SMSF advisers and trustees should do to further strengthen their chances of not being caught by the Part IVA provisions with these types of recontribution strategies.
“Make the [strategy] all about the outcome, not about the purpose. Don’t sell any strategy, whether it’s a recontribution strategy or not, on a tax basis; make it all about retirement,” he advised.
