ATO scrutinises superannuation early access

Content Summary

Elizabeth Fry | September 2020

This article was current at the time of publication.

Australians who dipped into their super under the Australian Government's early release scheme but actually did not qualify could face hefty fines and be slugged with an unexpected tax charge.

They also risk putting a big dent in their retirement savings.

On 22 March, the federal government announced a temporary measure to allow individuals to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21 in an attempt to mitigate the economic effects of the coronavirus.

In July this year, the Australian Taxation Office (ATO) told a Senate Select Committee on COVID-19 that it is looking at "in the order of hundreds of people" who have flouted eligibility rules.

The early release scheme — which allows only financially stressed people to withdraw their super early — is based on self-assessment. However, data analytics organisation illion found that just under 40 per cent of those who accessed their super had seen no drop in income.

ATO deputy commissioner, John Ford, has warned that those taking illegitimate advantage of the COVID-19 scheme will come under intense scrutiny. He says the ATO is investigating serious cases and will act against people who "deliberately exploit the system".

Put simply, anyone attempting to mislead the ATO will be hit with fines of up to $12,600 and a stiff tax penalty as the withdrawn money can be counted as assessable income and taxed at marginal tax rates.

However, Ford supports those who might have made an honest mistake.

"If this is the case, we will work with them, or their tax professional, to help resolve their position. Only in serious cases where an applicant has deliberately applied knowing they were ineligible, will we apply penalties."

The ATO will also consider setting aside penalties if people voluntarily disclose their actions, he adds.

Seeking professional advice is recommended before making early withdrawals

According to the Australian Government, A$31.7 billion worth of payments were made as of late August, 2020.

Ford recognises that because of the need for quick access to funds, people rushed to apply for early release without first seeking professional advice. This is despite the limited relief provided by the Australian Securities and Investments Commission (ASIC) aimed at improving the availability of financial advice in relation to this access.

The role of this relief is to improve access to financial advice to consumers affected by COVID-19 measures. Amongst other things, the relief permits registered tax agents to give advice to existing clients about the early release scheme, without needing to hold an Australian Financial Services Licence — subject to several conditions.

A Record of Advice (ROA) — a concise document required by the Australian Securities and Investments Commission (ASIC) — under their COVID-19 early release relief, is shorter and simpler than the comprehensive Statement of Advice (SOA) and may help make advice more accessible.

With professional financial advice being such a hot topic, all eyes are awaiting the data that the watchdog has been collecting.

An ASIC spokesperson said the regulator will evaluate over time how the relief has gone in practice.

The spokesman said there have been no queries regarding the regulator's decision to allow tax agents to provide advice on early access but "part of the reason for this may be that we worked closely with the accounting bodies in designing the regulatory relief".

While regulatory relief rules allow tax agents to advise on early release, Richard Webb, CPA Australia's policy adviser financial planning and superannuation, notes practitioners might want to refer clients to professionals who can advise on all aspects of superannuation.

"Withdrawing money from super can have a massive impact on retirement income down the track," Webb says, adding that anyone considering early release should get financial advice lest they make a decision they come to regret.

"Future retirement savings will take a considerable hit if funds are removed from a tax-friendly environment and they lose the power of compounding returns over the long term. Worse, given current volatility, members risk losses by selling when the market falls."

He notes that markets bottomed out in April — the same month that the early release scheme became effective — and that the market has progressively tracked upwards since.

"Those who accessed super early will have lost the benefit of that market rebound and will probably buy into a more expensive market later on," he says.

Webb warns that early withdrawals from accounts with low balances may also result in loss of group insurance, as members might not be able to fund the premiums.

Putting money back into super may not be simple

Topping up super is a smart way to bolster retirement savings, but as Webb points out, contributions caps restrict how much you can put in. Further, putting unused money back into super after withdrawing it under early release can be tricky.

Concessional contributions from pre-tax income up to $25,000 are taxed at 15 per cent. Contributions through salary sacrifice or super guarantee payments made by employers reduce taxable income.

"However, it might take many years to make up the $20,000 that was withdrawn," Webb says. Excess contributions are taxed at an individual's marginal tax rate and an interest fee is charged.

Breaching non-concessional or after-tax contribution caps can result in being taxed at the top marginal tax rate of 47 per cent.

Ford says: "We encourage tax agents to ensure their clients are aware of this to ensure there are no unintended consequences."

Importantly, the ATO is specifically targeting "re-contribution strategies".

"Early access to super was intended to help financially-strapped people not to supply tax breaks. In a social media post, the ATO expressed concern that some are 'artificially arranging affairs' to meet the eligibility criteria to withdraw and re-contribute super to claim a tax deduction," Ford says.

The ATO notes: "Where people deliberately exploit the system, we will take action."

It has already seen some examples of people doing the wrong thing and responded quickly and decisively. The message is clear: the ATO will not tolerate anyone engaging in illegal behaviour.

Further, putting back early release money can affect eligibility for a $500 super co-contribution from the government. Additionally, high income earners can be hit with a wealth tax which can take a large bite out of any tax concession for which they may be eligible.