ATO Cracks down on SMSF Tax Scams

The ATO has identified a significant number of retirement planning schemes that were designed solely to help people avoid paying tax, rather than minimise tax, and is working to close them down.

The ATO has set up a project called “Super Scheme Smart” designed to warn off errant SMSF investors with an education program and they are urging self-managed retirees to ‘blow the whistle’ on practitioners they believe are promoting illegal tax schemes.

What to look out for

The ATO is concerned that older taxpayers are being targeted by promotors and have recently seen an increase in the number of schemes that are designed specifically to target those approaching retirement.

They are likely to be people over 50 looking to put significant amounts of money into super, usually through SMSFs. They are also likely to be small business owners, self funded retirees or property investors.

The arrangements are usually highly contrived and complex, involving lots of paper work and leave the taxpayer with a major tax benefit.

They typically fall into two types: schemes avoiding income tax on normal earnings and schemes designed to claw back tax already paid on dividends.

Schemes aimed at diverting income are the simpler of the two types and they work like this:

• The taxpayer provides services to a client through their trade, business or profession. The client is then billed for the services through a company or trust entity.
• When the entity receives payment, it directs the money into the individual’s SMSF. The SMSF trustee treats the payment as a return on an investment in the entity made by the SMSF.
• The SMSF trustee treats the income as subject to tax at a concessional rate of 15c in the dollar, or, if the fund is in pension phase, at zero tax.
• The end result is income earned in the normal course of work, instead of being taxed at the person’s marginal rate, is taxed at the concessional rate, or not at all.

The arrangement is a sham as the SMSF has not invested in the trust or company, which is simply being used as a vehicle to turn taxable income into super.

Dividend Stripping

This is even more complex and involves clawing back tax already paid on company profits.

How it works:

• A private company that has made profits and paid tax over the years is able to pay out any undistributed profits as fully franked dividends.
• Those fully franked dividends are assumed to have tax already paid on them at 30c in the dollar.
• The owners can choose to move the shares in the company into their SMSF. After a 45 day waiting period the company can pay out its undistributed profits as dividends which are paid into the SMSF.
• If the SMSF is in pension mode, any income it receives is tax free. That entitles it to a refund of the unused franking credit offsets from the ATO.

That would mean the SMSF and its members get the 30c in the dollar tax already paid by the company on the dividends back in cash.

If it looks too good to be true, it probably is

People caught using an illegal scheme risk losing their retirement funds, as well as their right to manage and operate a SMSF.

Talk to a Morrows SMSF expert today if you think you might be involved in one of these schemes. 

Source: smh.co.nz and thenewdaily.com.au