One should be wary if someone offers you tax avoidance arrangements that improperly channel money or assets into your SMSF so that you pay less tax. These schemes easily appears as ‘too good to be true,’ and the ATO warns of the possibility of losing some or all of one’s retirement savings and incurring penalties for doing so. In addition, they may promote the illicit early release of benefits for personal use from your fund.
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How do I identify the schemes?
Schemes often come in recognisable patterns. The first characteristics they share is bringing forward a tax benefit, which involves seemingly superfluous steps or transactions, designed to give the taxpayer minimal or zero or even a tax refund, and are artificial arrangements with complex structures around an existing or new SMSF.
To clarify, they’ll often sound ‘too good to be true’ and will frequently affect your initial thought process.
Moreover, an SMSF is a trust that is typically administered solely for the purpose of providing retirement benefits to its members. In general, it is unlawful for anyone other than the trustee to benefit from the SMSF. By participating in these schemes, you run the risk of losing some or all of your retirement savings and incurring severe penalties. You could also be disqualified as a trustee of your SMSF, resulting in the liquidation of your fund.
You can learn more about them here: All you need to know about disqualified SMSF trustees
You should also consider how your arrangements impact your SMSF and whether they violate tax and superannuation laws. In many SMSFs, dealings (or transactions) with familiar parties and the repercussions of not dealing on an arm’s length basis are crucial issues.
One of the ways you can avoid investing in a manner that could result in significant capital gains tax and NALI repercussions by speaking with an SMSF specialist for advice on the structure and obtaining independent valuations of the type of asset in which you are investing.
We also recommend tax professionals report tax avoidance schemes that are marketed to them to protect their clients and their practice.
Residential real estate acquired through illegal means
Such schemes are designed for first-time homebuyers purchasing a house-and-land package who wish to join the Australian real estate market.
These schemes may be structured differently, but typically involve the following such as, establishment or use of an SMSF, rollover of a member’s super benefits from an existing fund to the SMSF, SMSF investing in a property trust (an unrelated unit trust) for a fixed period and rate of return; being a contributory fund with other investors, or on-lending of money by the property trust to help individuals purchase real property; secured by mortgages on the property.
Once the investment has been made, the member obtains access to funds from a third-party entity to assist the fund in purchasing residential property through an arrangement commonly known as a ‘loan’. Depending on the plan, these funds are used for all or a portion of the deposit, the balance of the purchase price, and any associated fees.
In some instances, the funds are also used to consolidate the member’s personal obligations in order to secure a mortgage.
In exchange for a substantial commision paid by the fund, the scheme promoter will typically assist:
- The creation of SMSF and the real estate investment; OR
- Organising the property purchase, including the payment of the down payment and mortgage.
This creates great concern as In the eyes of the ATO, your SMSF will appear to be a sham and non-compliant with the solitary purpose test.
Additionally, the arrangement may include:
- Illegal early access to superannuation benefits by members
- Provision of financial assistance to a member using the fund’s resources
- Provision of a ‘loan’ to a member to help them purchase a property (if a genuine ‘loan,’ will be an in-house asset of the fund).
When determining whether a scheme constitutes a breach of the superannuation laws, we will adopt a ‘look-through’ approach and evaluate the entire arrangement.
If funds are used to assist a member in purchasing a home indirectly through the SMSF’s investments in other entities, this will be considered unlawful early access to superannuation benefits by the member. Included in the member’s taxable income and taxed at their marginal rate. Additionally, tax shortfall penalties may apply.
The trustee will have violated at least one of the superannuation laws, and severe penalties may apply. The trustee may be a person who is personally liable to pay an administrative penalty and will risk being disqualified from acting as a trustee.
If you find yourself being involved in a scheme like this, you should make a voluntary disclosure, see SMSF early engagement and voluntary disclosure service. ATO will then take this into account when determining any penalties that may apply.
In conclusion, it’s crucial to be really careful and keep your eyes peeled when you come across any tax avoidance schemes or arrangements that promise to magically reduce your tax burden or offer unbelievable benefits.
The next time someone approaches you with such schemes you should check their verification through the ASIC financial register. You can report them as well to ATO with confidentially; not only will this protect you but others.
Remember, safeguarding your financial well-being is our priority, and we are dedicated to providing you with the guidance and resources necessary to make sound financial choices. Get in touch with us today, for our team of experts are ready to provide guidance and support to protect your retirement savings and ensure legal compliance.