Thank you, Peter, for the invitation to come and speak again. Good afternoon, everyone.
I’m very pleased to be speaking at the SMSFA conference for another year, in sunny Brisbane this time, and to share the stage once again with Leah from ASIC, our fellow SMSF regulator.
The theme of this year’s conference is ‘Level Up’ and so I thought I’d share with you what the ATO is doing to level up as a regulator this year.
Our data tells us that the vast majority of SMSFs are doing the right thing, which is important to acknowledge. But as a regulator, our focus is naturally drawn to those who are not.
The issues that most concern us remain consistent. We continue to focus on regulatory breaches and tax planning arrangements that inappropriately reduce the tax payable of individuals and entities associated with the fund.
Illegal early access estimate
But our greatest concern is illegal early access, where members access some or all their retirement savings illegally, that is before meeting a condition of release.
This isn’t a new message, but this is a major focus for us. I’m here to tell you about how we are levelling up our approach to this risk this year, and how you can help.
To better understand and address this risk, we have undertaken a significant new program to estimate the amount of money illegally withdrawn by trustees. This illegal early access estimate allows us to measure the size, scale and trajectory of this risk, as well as gather intelligence to help address this issue.
The illegal early access estimate has the same rigour and best practice approach used in the ATO’s other tax gap programs allowing us to measure the performance and health of the tax and super system. This includes using an independent external panel who review not only the method, but also the calculation to ensure they are reliable enough to be published.
What the estimate revealed
So, I’m here today to announce for the first time what we have found.
For the 2020 year we estimated $380 million of super has been illegally withdrawn by trustees of SMSFs. This figure would have been half a billion dollars if we hadn’t protected over $125 million leaving the system as part of our new registrant risk reviews.
In the 2021 year, we estimated over $255 million of super has been illegally accessed with almost $170 million additional protected at registration.
Don’t let the scale of the overall super system diminish the significance of this issue. These are large amounts of money and do not include prohibited loans. Across these 2 years, a total of $635 million of superannuation savings has left the system illegally through SMSFs.
Prohibited loans are another way trustees inappropriately provide financial benefits to members or related parties. In the 2020 and 2021 years, our analysis found SMSFs entered into over $200 million in prohibited loans each year. What is pleasing, is over 75% of these loans have been repaid.
These estimates really highlight why as a regulator we are so concerned and why it’s important for all of us to ensure SMSFs aren’t seen as a vehicle to access super illegally or to provide short-term finance.
Our findings indicate newly established SMSFs were more likely to engage in this behaviour compared to established funds. Around two-thirds of the $930 million at risk over these 2 years appears to relate to individuals entering the system with no genuine intent to run an SMSF.
Drivers of illegal early access
There are various reasons why individuals illegally access their retirement savings. Lack of knowledge and attitudes towards super are key drivers.
We also know from our interactions with trustees that people who dip into their super illegally may be dealing with some form of financial stress or other personal issues. In these situations, accessing retirement savings in accounts they control, can be too great a temptation to resist.
The law already provides for scenarios when it is appropriate for people to legally access their super early. The financial hardship provisions administered directly by super funds, and the compassionate release of super rules administered by the ATO set out the situations in which the parliament has decided that it’s appropriate for people to legally access their super early and there are rules around the conditions, and the taxing treatment of any superannuation savings accessed.
How illegal early access happens
The illegal early access estimate program is based on the 2020 and 2021 years due to the availability of data, but there are already indicators in the 2022 year that suggest illegal early access behaviour is still prevalent.
We continue to see many new trustees enter the system with the sole intent of raiding their retirement savings, often facilitated by promoters charging a large fee.
When a newly established SMSF makes a rollover but then doesn’t lodge their first annual return, this is a red flag. Currently 16% of funds registered in 2022 have failed to lodge their first return, which means these returns are at least 12 months overdue. Of these, 50% or 2,500 appear to have rolled money into their SMSF.
Then there’s existing trustees who inappropriately access their super and stop lodging to avoid detection. For the 2022 year, there are around 20,000 SMSFs that for the first time have failed to meet their lodgment obligations who also have members that have not yet reached preservation age.
While there may be legitimate reasons for these delays, they are still at least 7 months overdue and as these members have not reached preservation age there is a heightened risk.
Finally, we see some existing trustees who do continue to lodge but have breached the operating standards and a contravention is reported to us.
So far for the 2022 year, we have received around 18,000 auditor contravention reports for around 13,000 SMSFs which include nearly 40,000 contraventions.
Almost 34% of these contraventions indicate trustees may have inappropriately accessed their retirement savings by breaching payment standards, establishing prohibited loans with members and relatives, or not meeting in house asset requirements.
Levelling up our response
So how are we levelling up our response?
To prevent this behaviour, we provide support and guidance products, undertake new registrant reviews, and remove SMSFs from superfund lookup where they fail to comply.
The new registrant reviews have protected significant amounts of retirement savings leaving the system before it should. We risk assess every new registrant and the way in which we do this is becoming more sophisticated. For example, we identify individuals with outstanding personal lodgment obligations, overdue tax debts and those who’ve previously made an early release of super claim.
I mentioned earlier the financial hardship and compassionate release rules as the legitimate way to access super early if you meet the conditions. As part of our risk reviews, we specifically look for individuals who had previously applied for early access and then attempted to set up an SMSF. In the 2023 year we identified and reviewed 1,300 new SMSF registrants in this situation.
We’ve also scaled up our compliance actions and as a result, the number of sanctions we’ve applied has significantly increased. Consequences of this serious breach of obligations usually involve disqualification as a trustee, taxation of the benefit that was accessed and the imposition of penalties. What’s really sad is that often the trustee ends up worse off financially.
Let’s look at the case of Betty who was convinced by a promoter to illegally access around $100,000. However, after paying the promoter, taxes and penalties, Betty was only left with $15,000 and she lost most of her retirement nest egg. Betty was one of 753 trustees we disqualified in 2023.
Anyone disqualified can never be an SMSF trustee again and their names are on the public record forever, for all to see. This could come up in any background checks which can affect their personal and professional reputation. If we disqualify a trustee who is an SMSF auditor or holds an Australian Financial Services licence, they are referred to ASIC. Tax agents are referred to the Tax Practitioners Board.
We’ve also stepped up our focus on promoters as we’ve seen an increase in illegal early access schemes and the financial impacts on the victims can be devastating. Promoters often target people in vulnerable communities and these victims, like in the case of Betty, may be charged exorbitant fees, lose their retirement savings, be exposed to fraud and face compliance actions.
We currently have a number of investigations underway and continue to work closely with other law enforcement agencies such as ASIC, the State and Federal Police and the Tax Practitioners Board to share intelligence and address inappropriate behaviours. Sanctions can be severe and include the loss of professional licences, substantial additional tax, civil penalties of up to $750,000 and criminal prosecution which can result in imprisonment for up to 5 years.
What you can do to help
I covered earlier how 66% of the illegal early access behaviour we’re concerned about relates to individuals entering the system with no genuine intent to run an SMSF. We also know that over 80% of people who register an SMSF do so with the support of a tax agent.
Accountants, financial advisers and other SMSF professionals have a key role to play in addressing this problem. This may include busting myths or making sure you don’t overestimate the financial literacy of your clients.
If the registration of an SMSF doesn’t look right or feel right for your client, have a conversation with them, plant the seed – do they really understand what they’re getting into, when they can legitimately access their super, the significant costs of doing something illegal and the dangers of relying on incorrect advice?
The fact sheet we have developed on illegal early access to super provides useful information and a good foundation for this conversation.
What about established funds?
Where established funds have gone off track we often find where you’ve been able to support them, this provides a huge sense of relief and saves cost, time and stress. So, look out for the warning signs that a trustee may have veered off track.
Illegal early access, non lodgment and financial difficulties often go hand in hand. In practical terms if you see clients in this situation, reach out to them to help them resist temptation.
I encourage you to connect with your clients and use your insights into their particular circumstances to help resolve any issues. You may be able to make use of our voluntary disclosure or lodgment deferral services.
I’ve already mentioned how concerned I am about the impact promoters can have on individuals so please help stamp out this behaviour. You’re in a unique position to do this as often you hear firsthand about the reasons why an individual has chosen to set up an SMSF or invest in particular products.
You can protect victims by reporting promoters of schemes through our tip off form on our website.
In recent times I’ve been pleased to see an increase in professionals reaching out to let us know about arrangements they’re concerned about. We have been able to use this information and share it with ASIC and other regulators to help protect individuals from being coerced into these schemes.
Conclusion
In wrapping up my presentation and announcing the estimate today, I’m sure you will all agree it’s not acceptable for hundreds of millions of superannuation dollars to be raided out of the SMSF system each year.
This impacts the integrity of the system, an individual’s retirement income and puts pressure on taxpayer funded pensions. So now that we know more, it’s incumbent on all of us as custodians of the system to LEVEL up the way we respond.
Thank you. I’ll hand over now to Peter as I am sure he has a question for me.
