SMSF excess contributions tax avoidance: ATO targets dodgy deeds
What arrangements is the ATO targeting?
The ATO is targeting provisions in SMSF deeds that try to avoid the payment of excess contributions tax. These provisions:
- purport to establish a separate "trust" to hold amounts paid in excess of contribution caps;
- purport to allow any amounts paid in excess of contributions caps to be repaid (with earnings) to the member.
People relying on these provisions assert (incorrectly, in the ATO's view) that the excess contributions do not attract excess contributions tax.
Taxation implications of these avoidance arrangements
The ATO lists the taxation implications of these arrangements — namely "whether:
a. the clauses are effective in creating separate trusts, in particular whether the subject matter of the relevant trusts can be identified with certainty;
b. the contributions, any income arising from their investment, is correctly assessed to either the trustee of the SMSF or the member;
c. the insertion of such clauses in the SMSF deed actually has the effect of avoiding excess contributions tax;
d. the funds received by the SMSF are in fact contributions; and
e. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 2 to the Taxation Administration Act 1953 (TAA)".
This final point is particularly important for advisers who recommend SMSF deeds containing the arrangements. There are serious penalties for advisers found guilty of promoting a tax exploitation scheme under the TAA.
Superannuation implications of these avoidance arrangements
The ATO lists the implications of these arrangements under the Superannuation Industry (Supervision) Act 1993 (SIS Act) and its Regulations, namely:
a. whether "the return of the amounts of the excess contributions to the member is contrary to the contributions, preservation and cashing operating standards in the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations)".
That is, before funds can be released to a member, a condition of release must be met. Clearly, refunding excess contributions to avoid excess contributions tax is not a condition of release.
b. whether "the intermingling of the excess amount that is purported to be held under a separate trust with the assets of the SMSF has implications for whether the trustee has complied with the sole purpose test set out in section 62 of the SIS Act".
The intermingling of super and non-super assets may breach section 52 of the SIS Act, which requires that the trustees of the SMSF keep the assets of SMSF separate from assets held by the SMSF trustees personally, and assets held by a standard employer sponsor or any associate of a standard employer sponsor of the SMSF.
What is the ATO's view?
The ATO's view is that the arrangements described above are ineffective.
Consequently, the ATO considers that:
1. amounts paid in excess of the caps should be treated as excess contributions under the SIS Act and Income Tax Assessment Act 1997; and
2. a trustee who relies on such provisions may breach the sole purpose test under section 62 of the SIS Act.
What the ruling does not explain?
The ATO does not, however, explain why such arrangements are ineffective or exactly how the sole purpose test will be breached. It simply refers to Taxation Ruling 2010/1 (with respect to superannuation contributions) and SMSF Ruling 2008/02 with respect to the sole purpose test.
Presumably, the ATO's position is that:
1. All contributions an SMSF receives will be deemed to be superannuation contributions — regardless of the purported existence of a separate trust;
2. Even if one assumed that the contributions are not superannuation contributions, then they should not have been received into the SMSF because this results in intermingling of super and non-super assets in breach of section 52(2)(d) of the SIS Act; and
3. If the SMSF trustee pays money out of the SMSF when no release condition has been met (but, instead, pays the money out in order to avoid excess contributions tax), then the sole purpose test has been breached. One of the reasons it has been breached is that the SMSF is not being operated for the sole purpose of providing benefits to members on their retirement (or their death or incapacity) under section 62 of the SIS Act.