ATO urges advisers to ask its opinion on SMSF tax schemes

Mike Taylor

Managing Editor/Publisher, Financial Newswire

11 January 2023

The Australian Taxation Office (ATO) has issued new documentation around the use of Self-Managed Superannuation Funds (SMSFs) in tax avoidance and has urged financial advisers to seek a second opinion from the tax office if they are in any doubt.

The ATO has told advisers: “If you’re unsure, seek an independent second opinion from us, a professional colleague or another trusted expert”.

The ATO said if when it was informed early, “we are in a better position to reverse transactions, minimise penalties and allow taxpayers involved in these schemes to retain their capacity to manage their SMSF”.

The issues specifically raised by the ATO and noted by specialist lawyer, Adrian Hanrahan around SMSFs included:

Related-party property development ventures.

Non-concessional cap manipulation – Where individuals deliberately exceed their non-concessional contributions cap with a view to manipulating the taxable and non-taxable components of their super account balances.

Granting legal life interest over commercial property to SMSFs by an SMSF member or other related entity to divert rental income so that it is taxed at a lower rate without full ownership of the property ever transferring to the SMSF.

Dividend stripping – Where the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF, the purpose being to strip profits from the company in a tax-free form.

SMSF trustee’s undertaking limited recourse borrowing arrangements (LRBA) that are not consistent with a genuine arm’s length dealing.

Personal services income – Where an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF so it is concessionally taxed or treated as exempt from tax.

Asset protection schemes – Arrangements that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust (commonly referred to as a ‘Vestey Trust’) present a compliance risk.

Improper use of multiple SMSFs to manipulate tax outcomes.

Inappropriate use of reserves.