ATO, Compliance & Regulation, LRBA, NALI/NALE, Superannuation

ATO issues scheme warning

ATO early release scheme

The ATO has warned SMSF members to avoid early release and tax avoidance schemes noting many of these are related to property and lending within a fund.

The ATO has warned SMSF members to be aware of a range of tax avoidance and illegal early benefit release schemes noting a number of them relate to property and limited recourse borrowing arrangements (LRBA).

The regulator provided the warning via an update to the tax planning section of its website stating many of the schemes had the common features.

These features include the use of artificial or contrived arrangements with complex structures with an existing or new SMSF, involve unnecessary steps or transactions, and are designed to generate minimal or zero tax, a tax refund or bring forward a tax benefit.

With regards to property, the ATO raised its concerns around related-party property development ventures where group entities provide most of the services which in turn create substantial profits for an SMSF.

“While an SMSF can invest directly or indirectly in property development ventures, extreme care must be taken,” the ATO stated.

“Some arrangements can result in significant income tax and superannuation regulatory risks, and could potentially include the application of the non-arm’s length income (NALI) provisions and breaches of regulatory rules about related party transactions.”

This warning follows the recent release of Taxpayer Alert 2023/2 which stated all dealings within a property development must be at arm’s length to prevent the SMSF triggering the NALI rules.

In addition he regulator flagged schemes promoting LRBA and intra-group lending arrangements highlighting the latter “needs to be on terms that are the same as those commercially available to people in the same or similar lending circumstances”.

“Any variation of these terms may include but are not limited to the risks being taken by the lender, interest rates and terms of repayment.

“Increasing SMSF balances and profits to the SMSF via below-market value interest payments are of particular interest to the ATO when conducting reviews into non-arm’s length income matters.”

The ATO also recognised some schemes promoted the inappropriate use of reserves despite these being available to a limited number of SMSF members.

“Many existing reserves in SMSFs arose legitimately from legacy pensions that are no longer available. As a result, there are very limited appropriate circumstances where new reserves could be established and maintained in SMSFs.

“Structures using reserves designed to bypass super balance and transfer balance cap measures will attract our scrutiny.”


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