ATO warns pre-retirees on SMSF tax schemes

The Australian Tax Office has its sight set on individuals participating in an increasing number of aggressive tax avoidance and retirement planning schemes in self-managed superannuation funds.

The ATO has launched Super Scheme Smart, an initiative designed to help inform individuals and advisers about illegal retirement planning schemes. The program is a result of an increase in schemes designed specifically to target those approaching retirement.

The Tax Office has noted individuals approaching retirement are most at risk, in particular, those aged 50 or over, looking to put significant amounts of money into retirement. Self-managed super fund (SMSF) trustees, self-funded retirees, small business owners, company directors and individuals involved in property investment are also particularly at risk.

The schemes targeted typically involve a lot of paper shuffling; are complex and usually connected with a SMSF; are designed to leave the taxpayer with minimal or zero tax, or a tax refund, and aim to give a present day tax benefit by adopting the arrangement.

The ATO is targeting three schemes including:

  • Dividend stripping: where shareholders in a private company transfer ownership of their shares to an SMSF so that the company can pay dividends to the SMSF. The purpose being to strip profits from the company in a tax-free form.
  • Non-arm's length limited recourse borrowing arrangements: when an SMSF trustee undertakes limited recourse borrowing arrangements (LRBA) established or maintained on terms that are not consistent with an arm's length dealing.
  • Personal services income: where an individual (usually at pension phase) diverts income earned from personal services to an SMSF where it is concessionally taxed or treated as exempt from tax.

The ATO is urging individuals and SMSF trustees to come forward if they believe they are at risk or are already involved in an illegal scheme. In addition to severe penalties, individuals caught using an illegal scheme may risk losing some of their retirement nest egg and their rights as a trustee to manage and operate a self-managed superannuation fund.

Cristy Houghton