ATO, Retirement

Tax-avoidance via SMSFs targeted

SMSFs tax avoidance

Retirement planning schemes that use SMSFs to avoid tax, including those used by practitioners, have been listed as an area of concern and action for the ATO.

The ATO has flagged it is targeting retirement planning schemes that channel money through SMSFs for tax-avoidance purposes and is asking financial advice and retirement planning practitioners to report any strategies which may not be compliant with tax and superannuation regulations.

In an update directed to intermediaries involved with tax planning, the ATO stated some of the retirement planning schemes on offer are “actually too good to be true” and revealed it was currently focused on those involving SMSFs being encouraged by promoters.

“We’re having success in identifying tax-avoidance schemes, and are encouraging compliance in a co-operative way. We’re also closing down schemes that are designed to provide an unfair tax advantage,” the ATO said.

In a video in the update, ATO Deputy Commissioner Superannuation James O’Halloran recognised tax-avoidance schemes had common features and were disguised to look like legitimate structures connected to taxpayers’ existing or newly created SMSFs.

“They’re also often designed to give taxpayers minimal or zero tax, or even a tax refund, and by adopting an arrangement they aim to give a present day tax benefit. So invariably they sound too good to be true, and as such, they will most likely be illegal,” O’Halloran said.

Specifically, the update pointed to the ATO’s concerns with related-party property development ventures which, while accessible to SMSFs, could give rise to income tax and super regulatory risks, including the triggering of the non-arm’s length income provisions and breaches of regulatory rules regarding related-party transactions.

Limited recourse borrowing arrangements undertaken by SMSF trustees not consistent with a genuine arm’s length dealing are also being targeted as are asset protection schemes that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust or vestey trust.

The ATO noted the latter arrangement is unnecessary because the super system protects SMSF assets from creditors and may breach super laws by the giving of a charge over, or in relation to, a fund asset, a situation that could cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.

The regulator also flagged it is watching for cases where members deliberately exceed their non-concessional contributions cap to manipulate the taxable and non-taxable components of their super account balances and using multiple SMSFs to manipulate tax outcomes.

“We encourage all advisers in wealth management and retirement planning to think carefully about whether a retirement planning scheme is tax and regulatory compliant,” the ATO said.

“Seek a second opinion from a professional colleague or another trusted practising expert if you think you have been approached by a promoter, or inadvertently involved a client in a scheme,” the regulator recommended.

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