super scheme smart - australian taxation office€¦ · dividend stripping marek is a savvy...

Super Scheme SmartOur Super Scheme Smart information pack is designed to educate financial advisers, planners and other advisers on retirement planning schemes that are of concern to us. It will also help you alert your clients as to the dangers of these schemes.

In this information pack you’ll find:

answers to questions that you or your clients might have about retirement planning schemes

case studies

tips for you to help a client involved in a retirement planning scheme

For more information, visit www.ato.gov.au/superschemesmartSuper Scheme Smart 2

Retirement planning is a critical and exciting time for people

as they work out how they’ll manage their finances after they

leave the workforce. For many people this means relying on the

advice of financial planners, accountants, and other advisers.

Recently there has been an increase in schemes targeting people who are actively planning for retirement, as well as targeting the financial planners and advisers who specialise in providing self-managed superannuation fund (SMSF) advice to self-funded retirees. These types of schemes encourage individuals to channel money inappropriately through their SMSF, and are referred to as ‘retirement planning schemes’. Heavy penalties apply to individuals and advisory firms who are in the promotion of retirement planning schemes.

We want to ensure that soon-to-be retiring taxpayers protect their nest eggs, and do not enter schemes or arrangements which may result in the loss of substantial savings through non-compliance with Australian tax laws, including being subject to severe penalties such as the loss of the right to be an SMSF trustee.

While we do our best to find and shut down retirement planning schemes, the best approach is for us to all work together. It’s important for you to know what to look out for so you can advise your clients properly.


Q&A: retirement planning schemes explainedRead on to find out how to help your clients identify retirement planning schemes designed to avoid tax.


A: We are having considerable success in identifying tax avoidance schemes and taking action to encourage compliance in a cooperative way. As part of our work, we’re focusing on

closing down retirement planning schemes whose design is solely to avoid tax, which creates unfairness in our tax system.

Stamping out tax avoidance is an important part of the ATO’s role. What has been the ATO’s focus and what have the results been?

A: Common features include schemes that:

• are artificially contrived with complex structures, and it is often SMSF members who are targeted and encouraged to use their SMSF as part of the scheme

• involve a lot of paper shuffling

• are designed to give the taxpayer minimal or zero tax, or even a tax refund

• aim to give a present day tax benefit by adopting the arrangement

• most of all, sound ‘too good to be true’, meaning they probably are.

What are some of the common features of these schemes?

A: There are a number of schemes targeted towards individuals with an SMSF. This is because of the relative level of autonomy and control that SMSF members have in relation to the way their retirement savings are invested, subject to applicable superannuation and taxation laws. Some current examples we are concerned about include the following:

• Dividend stripping - Where the shareholders in a private company transfer ownership of their shares to a related SMSF so that the company can pay franked dividends to the SMSF. The purpose being to strip profits from the company in a tax-free form.

• Non-arm’s length limited recourse borrowing arrangements - When an SMSF trustee undertakes limited recourse borrowing arrangements (LRBA) established or maintained on terms that are not consistent with an arm’s length dealing.

• Personal services income - Where an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF where it is concessionally taxed or treated as exempt from tax.

What are retirement planning schemes?


Which clients are most at risk?

So what’s the ATO doing about this?

A: Anyone can fall prey to a retirement planning scheme, and typically those people moving closer to retirement are seen as the most at risk. This can mean anyone looking to put significant amounts of money into superannuation, particularly those over 50 who are:

• SMSF trustees

• self-funded retirees

• small business owners

• professional service providers

• company directors

• individuals involved in property investment

A: For starters, they’re against the law. While planning for retirement makes good sense, it must be done in accordance with the law so that the tax system is fair for all. Retirement planning schemes are often driven by promoters who are out to make a quick return and don’t necessarily have

people’s best interests at heart. Most of all we don’t want to see people risking their retirement nest eggs by breaking the law. This type of behaviour compromises the integrity of the superannuation system, and often forces us to apply harsh penalties.

A: Through the Super Scheme Smart campaign, we’re investing time and resources to provide information to those involved in retirement planning, as well as giving advice to taxpayers about the issues they may encounter when embarking on their retirement planning journey. The key priorities for our Super Scheme Smart initiative include:

• helping taxpayers to become smart about aggressive super schemes; to be aware of what to look out for; and where to go for help

• assisting financial advisers, planners and other advisers to help their clients protect their financial future.

We have dedicated staff investigating retirement planning schemes and they are engaging with those who are already involved, and looking out for others who might be.

In addition, we have set up a Super Scheme Smart website to provide taxpayers, financial planners and other advisers with information about these schemes.

What are the ATO’s main concerns around these schemes?


What do you want me, the financial planner, adviser or accountant to do?

What if clients ignore our push for engagement and get themselves into these types of schemes?

A: We urge financial planners, accountants and other advisers who provide wealth management and retirement advice to think carefully about the dangers of retirement planning schemes, and act in the best interest of your clients.

Help keep your clients’ financial future safe by being wise to the dangers of risky

retirement planning schemes and advising them of the potential consequences of tax avoidance schemes. If in doubt, seek a second opinion from a professional colleague or another trusted expert.

Tax planning is ok when it occurs within the tax and superannuation laws, and provides outcomes that are fair for all Australians.

A: Remind your clients that the penalties are substantial for those who deliberately get involved in tax avoidance schemes. The consequences may be financial through the imposition of higher default taxes and penalties, which will drain your clients’ retirement nest egg. Individuals may also lose their right to be a trustee of their own super fund. Where intermediaries are found to have been encouraging clients to adopt aggressive tax planning arrangements we will consider applying the promoter penalty

laws, and where tax agents are concerned we will consider referring the matter to the Tax Practitioners Board.

We have recently been successful in prosecuting the promoters of other aggressive tax planning schemes, and we will also be targeting promoters of retirement planning schemes. Promoters may face litigation under Promoter Penalty Legislation and may incur a significant financial penalty which is over and above the fees they have earned from promoting the scheme.


Case studiesDividend stripping

Non-arm’s length limited recourse borrowing arrangements

Personal services income


Dividend stripping

Marek is a savvy businessman who operates a successful privately-owned family business. He and his wife Halina are the only shareholders in the company, which has significant accumulated profits that can be paid out as franked dividends.

As smart investors, Marek and Halina also manage an extensive investment portfolio through their own self-managed super fund (SMSF).

Both Marek and Halina are in their 50’s, and are looking to make the move into retirement within the next few years to travel and spend more time with their grandchildren. As such, retirement planning is high on their agenda.

What was the scheme?

Marek heard of a scheme to reduce his tax burden and sought the advice of a scheme promoter.

The scheme promoter advised Marek to transfer his company shares to

his SMSF before the company paid out any franked dividends. That way, Marek could avoid the income tax that would have been payable had Marek and his wife received the franked dividends directly.

Marek decided to proceed with the scheme as a way of minimising his tax liability and to facilitate the refund of franking credits to his SMSF.

What happened as a result?

The scheme came up on our radar and we advised Marek he would be audited for the current financial year.

Marek was unconcerned, believing the scheme to be above board and in accordance with the tax and superannuation laws.

During the audit we determined that arrangements of this nature:

• may constitute an anti-avoidance arrangement, designed to provide a franking credit benefit for Marek through his SMSF

• direct franked dividends to the SMSF as part of what may be a dividend stripping transaction

• may give rise to a non-arm’s length income for the SMSF.

We informed Marek that we would investigate the arrangement further and suggested that he cooperate fully with our requirements.

Marek decided to seek independent advice from a trusted and reputable professional, as well as consulting the ATO website.

He determined that if he is found to have participated in a tax avoidance scheme, he risked losing part of his retirement nest egg and could incur severe penalties, including his rights as a trustee to manage and operate his SMSF.

To protect his nest egg, Marek worked cooperatively with us, understanding that this approach would produce the best outcome.

Marek and Halina – SMSF trustees

BUSINESSBUSINESS

BUSINESSBUSINESSBUSINESSBUSINESS

BUSINESS

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Non-arm’s length limited recourse borrowing arrangements

David and Claire are keen property investors and have been quite successful in buying and selling properties over the years.

Through a property investment club in which they are members, they learnt that 15% concessional tax rates apply to income earned from investment properties (for rental) purchased and maintained through a self-managed superannuation fund (SMSF).

What was the scheme?

Doug, a fellow member of the property investment club, contacted David and Claire and explained he was an expert who had helped many members of the club buy investment properties through an SMSF.

David and Claire established an SMSF and rolled over their retirement benefits into the new fund. However, the money they rolled over wasn’t enough to purchase the investment property. On the advice of Doug, David and Claire approached their bank for a loan to buy a rental property through

their SMSF using a limited recourse borrowing arrangement (LRBA), which limits the SMSF’s repayment risk on the loan to the recoverable value of the investment property.

Their bank was happy to approve the loan however David and Claire were unhappy with the terms of the loan.

Doug advised that given they have the necessary money held outside of superannuation they could lend this money to their superannuation fund by setting up an LRBA, instead of using a bank.

Under the LRBA David and Claire loaned the SMSF 100% of the principal over a 15-year term; and the trustee of the SMSF is required to make periodic (monthly) repayments of the loan principal with the first repayment made five years after the loan is established. The interest rate applied to the loan was zero.

What happened as a result?

David and Claire’s accountant prepares their individual and SMSF tax returns each year. The accountant

informed them he had some concerns with this LRBA under tax and superannuation laws, and informed them he would consult with the ATO for further clarification.

We advised that the arrangement is a non-arm’s length LRBA. Accordingly, all income from the asset would be considered to be non-arm’s length income; and as a consequence all of the rental income received by the SMSF would be taxed at 47%.

David and Claire decided to refinance their rental property investment through a bank and dissolve the non-arm’s length LRBA (avoiding the 47% tax rate) with future rental income taxed at the SMSF concessional rate.

David and Claire agreed that in the future, they would always seek a second opinion from an independent financial advisor or refer to the ATO website for further superannuation and taxation guidance.

David and Claire – property investors

LOAN 0% p.a.To: My Fund For

Property


Personal services income

John is a locum doctor, working as a sole trader. He invoices the various medical practices that he locums using his personal ABN.

John and his wife had for many years operated their own self-managed superannuation fund (SMSF).

As John approached retirement age, he wanted to get financial advice on how best to maximise his income for retirement.

What was the scheme?John talked with a friend about wanting a better plan for his retirement. His friend told him that he’d heard of a great scheme and put him in touch with the promoter.

The promoter suggested that John set up a unit trust, with John’s SMSF as a unitholder, and that his clients make payment for his services to the unit trust. The unit trust distributes the income earned by John (in part or whole) to his SMSF as a ‘return

on the SMSF’s investment’. As a trustee of the SMSF, and being over the preservation age, John treats the income as subject to a concessional rate of tax or exempt from tax (for supporting pensions).

What happened as a result?John was quite sceptical; the arrangement seemed quite convoluted and sounded almost too good to be true.

He sought a second opinion with his own tax agent who is registered with the Tax Practitioners Board to get some independent advice.

After checking our Super Scheme Smart website the tax agent informed John that:

• there was no guarantee that this type of arrangement will reduce his income tax and the income may still be included in his assessable income as personal services income

• the amounts received by the SMSF may constitute non-arm’s length income of the SMSF such that the income is not eligible to be concessionally taxed, and is not tax exempt because it is supporting pensions and is instead subject to tax at the highest marginal rate of 47%.

The tax agent warned John that such arrangements are illegal. He warned that ‘schemes’ of this nature were on the ATO’s radar and explained to John that he may incur severe penalties if he proceeds, including a financial loss, and the loss of the right to manage and operate his own SMSF.

On the advice of his trusted tax agent, John decided not to proceed given the potential for personal and financial risk. He also decided to report the promoter to the ATO. John is thankful that he had the foresight to seek a second opinion and hopes others faced in a similar predicament do the same.

John – maximising income for retirement

LOW TAX

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JOHN

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Helping clients avoid the pitfalls: retirement planning scheme tips


We are here to help you protect your clients’ nest eggs, and

to prevent you and them from getting caught up in a tax

avoidance scheme. As a trusted adviser, you may be the first

port of call in identifying a problem. Here are a few handy

hints that we recommend you follow to act in the best

interests of your clients.

If in doubt, check it out• Alert the client - As soon as

you suspect a client may be involved in a risky retirement planning scheme, or they’ve come to you for advice, let them know immediately. Many people are probably unaware they’ve been approached to get involved in a scheme or may already be in one. Clearly explain the situation and the consequences for your client. If they have more concerns, we have plenty of resources available on our Super Scheme Smart website

• If in doubt, ask for a second opinion - If you’re unsure, seek an independent second opinion from us, a professional colleague or another trusted expert.

• Stronger together - It’s always in the interests of taxpayers when their advisers work cooperatively and communicate early about any retirement planning schemes that appear too good to be true so we can provide guidance and advice. When informed early, we are in a better position to reverse transactions, minimise penalties, and allow taxpayers involved in these schemes to retain their capacity to manage their SMSF.

Planning for retirement makes good sense, as long as it’s carried out within the tax and superannuation laws. We are here to help you protect your clients’ retirement nest eggs and early intervention is best for all sides. If you have a client that you believe has been lured into a dodgy scheme, let us know. Or if you believe you’ve been approached by a promoter to get you to recommend tax avoidance schemes to your clients, let us know. Anyone with concerns can call our Aggressive Tax Planning line, we’re here to help.

If you have any questions or concerns contact us:visit www.ato.gov.au/superschemesmart

call 1800 177 006

email [email protected]

super scheme smart - australian taxation office€¦ · dividend stripping marek is a savvy...

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