The dramatic overhaul of rules for our superannuation system that kicked in just over four months ago on July 1 has triggered a slew of “new tricks” in the wealth management game as investors explore what might be done in the new regime.
With clampdowns on how much you can put into super — and first-time limits on how much you can earn tax-free — some of the more “innovative” advisers, not to mention the more outright hucksters in the industry, have been rapidly devising ways to bend the rules.
Moreover, since borrowing for property is now allowed inside super funds and property prices have been strong — especially in Sydney and Melbourne — the temptation of playing the super system for tax optimisation has been intense.
This week the ATO put out an official alert on a number of these arrangements, a sure sign they have been popping up across the nation and a definite warning to all concerned there will be a price to pay if they are caught for tax avoidance.
To recap: the key changes on July 1 are: the maximum that can now be put into super per annum on a pre-tax (concessional) basis per annum is $25,000; the maximum that can be put in per annum on a post-tax (non-concessional) basis is $100,000.
Separately, earnings on amounts of more than $1.6 million in super are to be taxed — they can be left in the superannuation system but must be reclassified as “accumulation” funds where they will be taxed at 15 per cent or they can be removed altogether from super.
In the initial flush of coverage on the new super rules a number of obvious arrangements were highlighted for investors now restrained by any of these changes which — importantly — are all applied on an individual basis. The $1.6m cap is applied per person.
The two most common new tricks are:
1. Take money out of the system.
Under existing personal tax rules anyone at any age is entitled to the first $18,000 they make each year to be free of income tax. Retired investors restrained by the caps can remove amounts in excess of $1.6m and claim at least the first $18,000 in earnings on those amounts as tax free, they may also be able to claim certain tax offsets.
2. Split contributions to super.
In many cases one person in a couple may have earned more and has a higher super balance. This made little difference when all pension income was tax-free.
An extreme example that highlights the issue might be a couple where one person had $2m in super and the other had $100,000. One member of the couple under that scenario could break the $1.6m cap by structuring their affairs so that both parties in the couple have a little over $1m each and there would be no tax due.
But these new tricks are entirely legitimate. In contrast, the ATO this week has pinpointed three areas where new innovations are not welcome at all, certainly to the Australian Taxation Office.
ATO Deputy Commissioner James O’Halloran has pointed out that these unwelcome schemes have in common a flavour of being “too good to be true”. More important, they are what the ATO calls “artificially contrived with complex structures usually connecting an existing or newly created SMSF.
• It is understood the most common and troublesome of the new arrangements is where property developments by related parties are linked to SMSFs. This is where perhaps an extended family try to have their bread buttered on both sides by financing a property development through their SMSF which is ultimately aimed at housing a relation.
• A second increasingly popular arrangement in property is the manipulation of what is known as a “life interest” where an SMSF can benefit from the rental income of a property without actually having the property inside the fund. Remember, with the average house price in major cities now close to $1m, a house inside an SMSF can easily push the fund over the $1.6m balance cap.
•The other new trick is manipulating the post-tax caps to create a benefit not intended by the original design of the system — “arrangements where individuals (including SMSF members) deliberately exceed their non-concessional contributions cap to manipulate the taxable component and non-taxable component of their fund balance upon refund of the excess”, as the ATO puts it.
The problem for both the ATO and the vast majority of investors is that the new rules are so complex it is highly likely that innocent investors will caught here. But the ATO has warned that it is up to the investor to make sure they do not transgress the tax code. The penalties in this area can be severe, ranging from losing the right to manage an SMSF to facing cash penalties that would do the exact opposite of enriching an SMSF.
The ATO is also keeping a close eye on when investors are opening a second SMSF to create tax avoidance. Of course, having two SMSFs can be legitimate and it would have to be seen as practical if one SMSF was holding taxable funds and the other was holding non-taxable funds.
But what if the investor gets misled by an adviser (or as the ATO would call them “a promoter”)? If you are suspicious, get a second opinion, says the ATO.
By James Kirby
18 November 2017