ATO crackdown: SMSFs and illegal early release of super

The new program, called the ‘illegal early access estimate’, enables the ATO to work out how much money is leaving the system early – before a condition of release has been met.

“[It will] allow us to determine the size, scale and trajectory of [the] risk, as well as gather intelligence to assist us in addressing the issue,” ATO Assistant Commissioner Justin Micale says.

The ATO plans to inform the public of its initial findings in early 2024.

Illegal early access is the ATO’s biggest concern about SMSFs at present. For the individual member, it can result in a major decrease in retirement funds, as well as payment of additional tax and penalties.

Reading the warning signs

Warning signs to watch for include:
Loans from an SMSF to a fund member, relative or related entity, which could amount to a loan prohibited under the operating standards
A client mentioning that a promoter has suggested they can access their super early

Two high-priority warning signs that should raise immediate red flags, though, are financial difficulties and a failure to lodge a tax return.

“Overwhelmingly, we find most people who dip into their super illegally are experiencing some form of financial stress,” Micale says.

He suggests accountants should pay particular attention when individuals and business owners are facing cash flow challenges, cost of living pressures and relationship breakdowns, or if they are carrying increasing debt or having trouble meeting their repayment obligations.

“In these circumstances, the temptation to access retirement savings invested in accounts they control and have direct access to often becomes too great.”

Non-lodgement of annual returns should always prompt more attention, whether a client is new or has held an SMSF for years.

The ATO pays particular attention when newly established SMSFs that have received a rollover don’t lodge their first annual return. Micale points out that 17% of the 28,000 funds registered in 2022 are in this category, and half of those – 2,500 – appear to have rolled money into their SMSF.

“This suggests they may have deliberately entered the system to illegally access their super,” Micale says.

For existing clients who’ve been SMSF members for some time, a sudden failure to lodge should set off alarm bells.

“For the 2022 year, there are around 32,000 SMSFs, with members that have not yet reached preservation age, that for the first time have failed to meet their lodgement obligations,” Micale says.

“While there may be legitimate reasons for these delays, this group certainly presents with a heightened level of risk.”

Educating clients

The ATO told us that one in three existing trustees lacks the knowledge to manage or doesn’t take responsibility for managing their SMSF. Part of the solution, then, is educating those trustees.

“For some [new clients], this may simply involve providing them with advice on when they should seek support from licensed professionals and point them to educational resources,” Micale says.

The ATO’s latest resource is the ‘Accessing your super early may be illegal’ factsheet, which has been translated into 19 languages.

The IPA’s on-demand SMSF Advanced Audit Workshop, presented by SMSF specialist Shirley Schaefer, covers compliance in-depth, including release authorities.

Should red flags arise around an existing SMSF, the accountant should “encourage [the client] to improve their understanding of the rules, particularly those relating to conditions of release and loaning money to members and related parties,” Micale says.

Taking action

If an accountant suspects that a client is illegally accessing their super via their SMSF, then it’s important to act.

“If you have a client who has gone off track, it is always better for them to come to us, before we come to them,” Micale says.

The accountant should encourage the client to inform the ATO of their conduct by completing a voluntary disclosure form. This will be taken into account when the ATO determines sanctions.

It might also be necessary to engage the ATO’s lodgement deferral program.

If a new SMSF has made a rollover, but a first tax return hasn’t been lodged, the ATO might send a letter, stating that any illegally accessed super must be declared in the client’s personal tax return.

“If your client receives one of these letters, they should respond immediately,” Micale says. “If they don’t, the consequences are likely to be more significant, and involve additional tax, penalties, interest and disqualifications being applied.”

The ATO also urges accountants to report promoters by calling 13 10 20.

“If your clients have been approached by anyone suggesting they can withdraw their super early, they should stop any involvement with the promoter, and make sure they don’t sign any documents or provide them with their personal details,” Micale says.

Helping clients to feel better

A client who has illegally accessed their super may feel out-of-control, stressed and frightened, particularly if their conduct was driven by financial difficulties.

However, admitting wrong-doing and making a voluntary disclosure to the ATO are the first steps to recovery.

“We often find, where you’ve been able to support trustees to get back on track, it provides them with a huge sense of relief, and saves the cost, time and stress that may arise from ATO compliance actions,” Micale says.

IPA’s SMSF Advanced Audit Workshop is recommended for intermediate and experienced SMSF auditors, SMSF administrators and accountants. In the three-part series, SMSF specialist Shirley Schaefer covers the basics of SMSF audits, with a focus on compliance audit requirements. It’s available on-demand now, and worth 6 CPD points.