Aussies’ super at risk of 45% penalty tax rate due to perverse rules

The IPA, in collaboration with CPA Australia, Chartered Accountants Australia and New Zealand, Institute of Financial Professionals Australia, the National Tax & Accountants’ Association, SMSF Association, and The Tax Institute, said Australians could take a hit to their super simply by applying their professional or trade skills to their personal lives due to complex restrictions on non-arm’s length transactions.

And those most at risk with the new rules are tradespeople and professional services workers.

The current rules prohibit transactions with related parties at “mate’s rates” or no rate at all and the IPA has warned that something as simple as mistakenly using a work laptop to complete a personal task could trigger a breach.

It means that under the new rules, an accountant could be penalised for completing their own super fund’s returns unless they charge for it, but someone who is not a tax agent who completes and submits their return would not be penalised.

Another example would be a real estate agent who chooses to sell an investment property owned within their super fund and doesn’t charge commission and could also find themselves under scrutiny or the tradie who renovates or undertakes maintenance themselves and doesn’t bill their fund.

The penalty tax rate for getting it wrong can be 45 per cent or more and is applied to every contribution made to the super fund, including compulsory payments from employers.

The IPA warned an Australian with a $135,000 superannuation balance and an annual income of $90,000 could be slugged $6,000 in penalty taxes if they accidentally fall on the wrong side of these rules.

“That’s why we say the non-arm’s length expensing rules don’t hold up in the real world,” the collaboration of associations has stated.

“They need to be changed. Tradies, real estate agents, accountants and other professional service workers should be able to use their professional skills in their personal lives without putting their retirement savings at risk.

“Professionals and skilled tradies are not trying to circumvent the rules. It is simply easier and often makes financial sense to DIY these tasks.

“We collectively represent about 500,000 members and have made numerous submissions about the non-arm’s length expensing rules that threaten working Australians’ retirements.”

The group has written to Minister for Financial Services, Stephen Jones, requesting the government urgently fix this problem.

“We acknowledge the need for appropriately targeted integrity measures, however, we want the government to take a sensible approach that reflects what Australians expect,” it said in the letter.

“The current rules are an unnecessary overreach. It is not possible for a skilled worker to demonstrate to the Australian Taxation Office that even the most minor of these activities shouldn’t attract a penalty. We are urgently seeking a solution so thousands of people don’t fall afoul of the rules.

“These rules were set up to stop risky borrowing arrangements seen over 20 years ago. The type of borrowing the rules tried to limit has been outlawed since 2016. People are being penalised because of rules designed to fix a problem that hasn’t existed in half a decade. We need to see change.”