The ATO has warned SMSF trustees to avoid the latest range of retirement planning schemes that are targeting SMSF members, particularly those approaching retirement.
Stuart Jones, Thomson Reuters
As part of its Super Scheme Smart program, the ATO has released further information and case studies for Individuals and Intermediaries to highlight the warning signs and risks associated with these contrived arrangements.
ATO Deputy Commissioner James O'Halloran said such arrangements may be cleverly disguised to look legitimate but are often illegal and involve a lot of paper shuffling that can put SMSFs at risk. If a taxpayer becomes involved in any illegal arrangement, even by accident, Mr O'Halloran said they may incur severe penalties and jeopardise their retirement savings. Just because an arrangement is structured in a way which appears to satisfy certain tax and regulatory rules does not mean it is legal, he said.
Schemes on ATO radar
The latest schemes of concern to the ATO include:
- SMSFs and property development — artificial arrangements involving SMSFs and related-party property development ventures. While there is no specific prohibition preventing an SMSF investing directly or indirectly in property development ventures, the ATO warns that extreme care must be taken. The schemes typically involve an SMSF subscribing for units in a unit trust that enters into a joint venture to develop a property on land owned by another entity (often a related party). The development profits are often split 50/50 between the unit trust and the other entity, despite the initial contribution by the unit trust to the venture representing less than 50% of the total value. This disproportionate split of profits to the unit trust attempts to channel more of the profits to the concessionally taxed superannuation environment and boost the individuals' retirement savings. The ATO considers that any income distributed to the SMSF by the unit trust will be non-arm's length income (NALI) under s 295-550 of the ITAA 1997 and subject to 45% tax. Any breaches of the sole purpose test or the in-house asset rules under the SIS Act could also result in the ATO revoking the SMSF's complying fund status.
- Granting legal life interest over commercial property to SMSF — this results in the rental income from the property being diverted to the SMSF (as the holder of the life interest) where it is taxed at lower rates while the individual or related entity retains legal ownership of the property. Typically involves a small business owner using a deed to grant a life estate interest over business real property to their SMSF. While the value of the life interest is only a proportion of the property's value, the SMSF has full access to the commercial property and 100% of the income it generates, which is not reflective of a commercial relationship. Given the close relationship between the parties, the ATO warns that the rental income received by the SMSF may be subject to the NALI provisions (45% tax) if the amount paid by the SMSF for the life interest is not a fair market value. The ATO says this could also have implications for the members' non-concessional contributions cap and pension transfer balance cap. The ATO also notes that the granting of a life interest in relation to residential property (which is not business real property) may also breach s 66 of the SIS Act.
- Exceeding contributions cap to reduce taxable components — individuals deliberately exceeding their non-concessional contributions cap to manipulate taxable and non-taxable components of their superannuation interest upon refund of the excess. The ATO warns that such arrangements could be subject to the anti-avoidance rules in Pt IVA of the ITAA 1936.
While these schemes are not necessarily specific to the 1 July super changes, the ATO is concerned that they may appear attractive to uninformed SMSF trustees in light of the recent reforms. The latest schemes are in addition to the arrangements previously flagged by the ATO in relation to dividend stripping, diverting personal services income to an SMSF and non-commercial LRBAs.
Post-1 July 2017 arrangements
The ATO said it is also monitoring other arrangements that relate to the super caps and restrictions that apply from 1 July 2017, including the:
deliberate use of multiple SMSFs to manipulate tax outcomes. While the ATO accepts that the establishment of multiple SMSFs by itself does not give rise to compliance issues, the ATO says it will further examine cases for any subsequent behaviour intended to manipulate tax outcomes. For example, switching each of the respective funds between accumulation and retirement phase; and
use of reserves to circumvent the total superannuation balance or pension transfer balance cap provisions. The ATO accepts that many of the existing reserves in SMSFs have arisen legitimately in the context of legacy pensions. However, the ATO believes there are very limited circumstances where it is appropriate for new reserves to be established in SMSFs. Any inappropriate use of reserves by SMSFs will attract scrutiny, the ATO said.
The ATO recommends anyone with concerns about such schemes (or who would like to make a voluntary disclosure) should seek professional advice or contact the ATO's Aggressive Tax Planning line — tel: 1800 060 062 or email: firstname.lastname@example.org. See further the ATO Super Scheme Smart webpage.
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