(03) 9020 2905The small, small world of self-managed super fund legal eagles sounded like a henhouse with a fox loose yesterday when news broke of the sternest of Tax Office warnings.
The ATO warned that it was aware of several law firms selling trust deeds (and potentially recommending associated strategies) with provisions that are designed to get around enormous penalty tax provisions for those who exceed their contribution caps.
In its press release, the ATO said that it was concerned that some of these arrangements were designed to “avoid excess contributions tax”. The accusation is, therefore, “tax avoidance”, a giant leap beyond tax evasion. And there is no bigger sin a taxpayer, even a SMSF, can make in the eyes of the ATO. The ATO made it clear it was as prepared to nail the advisers giving the advice as the trustees who’d agreed to break the law.
There are only a handful or two of really top-line SMSF lawyers in Australia. They have understandably big egos that come with being able to charge like wounded bulls. It’s a highly competitive industry and there’s no love lost between most of the top players.
If they have any mutual respect, it’s grudging. At the recent Self Managed Superannuation Funds Professional Association of Australia (SPAA) conference in Melbourne, two of the biggest names had a proper barney while on-stage guests during a forum. The tete-a-tete came complete with name calling.
So, when several of the top lawyers were named in the one article that discussed tax avoidance, the email and phone calls started and the noise was decidedly catty.
So, what’s the issue? And should Eureka Report readers be panicking?
The issue is that the ATO believes some trustees – at the urging of some legal advisers – are trying to get around the concessional and non-concessional contribution limits. The government was clear and set strict laws that it wanted anyone who put in extra to face a taxation wallop.
Eureka Report readers will be familiar with those two limits. The over-50s have a few more years left where they can get in $50,000 a year in concessional contributions (the under-50s have a $25,000 limit). The non-concessional limit is $150,000 a year.
The ATO has reviewed some trust deeds that, in essence, direct the trustees to hold any excess contributions in a separate trust (even if the assets, or cash, are intermingling with the rest of the super fund). The ATO says the aim of the arrangement is that, by holding it in another trust, the money will not be deemed excess contributions and will therefore not be taxed at penalty tax rates, which can be as high as 93%.
Too clever by half, says the ATO.
“These clauses are an attempt to avoid the excess contributions tax if they exceed the relevant cap, even though the amount in question was clearly intended as a contribution and was treated as part of the super fund by the trustee,” ATO commission Michael D’Ascenzo said.
“The ATO has reviewed these arrangements and considers that they are ineffective.
“Anyone involved in or considering these arrangements should be aware that they face close examination by the ATO,” Mr D’Ascenzo said.
Could you be affected? If you know that you haven’t been breaching your contribution limits, then you’re probably okay.
However, if you believe that you’ve been given advice that suggests that you can get in “extra” contributions through such a strategy, seek more independent advice immediately. By all means, head back to your legal adviser and ask them whether they believe that you or your super fund are impacted by the ATO’s statement. Get the response in writing. If you’re still uncomfortable, seek a second opinion. Get that in writing also.
In the notes to the taxpayer alert, the ATO hints that could issue huge fines to individuals and trustees. But, more scarily for any legal representatives involved, the ATO has said it could seek to have those recommending the schemes declared “promoters”. By all accounts, the penalties there are real fire and brimstone, in the form of injuctions and fines.
*****
A year ago, when the deepest, darkest budget in a generation was being framed by Treasurer Wayne Swan, two short-term decisions were made in regards to the normally long-term investment vehicle of superannuation.
One was to halve the concessional contribution limits for everyone. This is a decision that was most painful for those over 50 who are trying to shovel money into super after decades of paying down mortgages and raising children. In overall numbers, perhaps tens of thousands of people will have been affected each year. Maybe 100,000 or so, at a pure guess.
The second one has grabbed fewer headlines – the reduction of the government co-contribution. This is partly because it hasn’t kicked in yet. The reduction was from the $1500 of recent years down to $1000, but it doesn’t cut in until the current financial year. So far, it has impacted, exactly, no one.
However, in terms of the overall number of people who will be affected, the co-contribution wins hands down. And, given that it’s aimed at roughly those earning below the average wage and arguably need the most help saving for their retirement, the one that made the least sense.
Last week we found out how widespread the impact will be. More than 1.4 million Australians will be impacted by the cut to the government co-contribution, judging by how many people received a co-contribution last financial year.
The ATO said it paid out $1.22 billion for the 2008-09 financial year. It paid a further $1.137 billion for the previous financial year. (And it was still paying out millions for previous financial years as well.)
The Government co-contribution is a favourite. It’s designed to allow people on lower taxable incomes to be able to put a sum of up to $1000 of non-concessional contributions into their super fund. In previous years, the government would match it with $1.50 for each dollar of qualifying contributions.
However, in last year’s budget, the co-contribution was dropped to one-for-one. It is due to be $1 for $1 for the 2010-11 to the 2011-12 financial years. For the 2012-13 and 2013-14 financial years, it rises back to $1.25 for each dollar. And from the 2014-15 financial year, it’s due to go back up to $1.50 for each dollar.
But with the Australian economy having dodged the GFC bullet, the coming budget should be anything but scary. And with any luck, the Federal Government might decide to reinstate the program at full value immediately.
For the current financial year, you’ll get a full $1000 co-contribution when you contribute $1000 if your income is less than $31,920. It phases out between $31,920 and $61,920.
The ATO’s figures, which split contributors into salary ranges, show solid support by people of all incomes. This is a popular program, which has the desired result of getting Australians to put away for their retirement. Let’s stop watering it down, particularly now that the the GFC panic has passed.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.