Increase in prohibited loans a concern: ATO

While the amount of illegally accessed funds from SMSFs has reduced, the amount of prohibited loans has gone up, the Commissioner of Taxation has said.

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Rob Heferen, Australian Taxation Office (ATO) Commissioner, said at the SMSF Association National Conference in Melbourne last week that with more money and more participants in the SMSF system, the regulator is continuing to see indicators of heightened risk in behaviours and arrangements that put retirement savings at risk or inappropriately take advantage of the tax concessions.

“We have seen increased sophistication of arrangements to facilitate illegal early release being promoted to vulnerable individuals,” he said.

“In the 2023–24 financial year, the ATO disqualified over 660 trustees. This was largely due to illegal access to superannuation funds, and over $7 million in administrative penalties and additional tax of $16 million was raised.”

Heferen continued that in February this year, the ATO released the illegal early access (IEA)estimate, an annual estimate of the total amount of super withdrawn by SMSF members before they are legally entitled to.

It revealed that for the 2019–20 year, the ATO estimated $381 million of super had been illegally withdrawn by trustees, while in the 2020–21 year, it estimated more than $256 million of super had been illegally accessed and that there were $206.2 million in prohibited loans.

“Our IEA estimate for the 2021–22 income year is $250.1 million, and with an estimated $231.7 million in prohibited loans,” he said.

He indicated that the ATO would also be focusing on non-lodgment of SMSF annual returns, regulatory contraventions, and non-arm’s length income and expenses, on which it recently released draft amendments to TR 2010/1 and LCR 2021/2.

“Growth in the SMSF sector has been widely reported. Registrations over recent years have reached record levels, with over 32,000 new registrations in 2023–24, up from just over 27,000 in 2022–23,” Heferen said.

“This trend is continuing with new registrations tracking towards 40,000 for the 2024–25 year. The sector is now 25 years old, and with this growth – and as you may reasonably expect – there has been a commensurate level of growth in SMSF-related risks and SMSF oversight.”

The Commissioner noted that SMSF trustees have a range of obligations, not just paying their tax obligations on time but also ensuring the savings in the fund cannot be used for any purpose other than accumulating, untouched, for the beneficiaries’ retirement.

“As the regulator of SMSFs, the ATO is focused on protecting the integrity of the system by ensuring trustees comply with their obligations, principally that funds pay the correct amount of tax when it is due, and operate within the law for the sole purpose of providing retirement benefits to their members,” he said.

“We do not have a prudential role and are not responsible for developing the law, providing financial advice or determining whether an individual should or shouldn’t set up an SMSF or whether the fund is making the right investment choices, but we do want to ensure that people go into this system with their eyes wide open.”

He noted that while there are trustees who are confident and financially savvy, there are those who are unprepared and lack the financial capability to manage their SMSF.

“Within this context, there are inherently increasing expectations. For the ATO, our approach to administering the legislation we are responsible for must be seen in the context of the growing scale of the sector and our legislated requirements to ensure that all taxpayers in the system meet their obligations,” Heferen said.

“For SMSF and financial professionals, it’s worth noting the very specific changes for tax professionals on the back of the PWC scandal. These expectations should be viewed as indicative of broader community and government expectations on the integrity of all professionals.

“And for those making the choice to run their own SMSF, it is vital for trustees to understand the importance of the ‘self’ element of self-managed funds.”

Keeli Cambourne
February 24 2025
smsfadviser.com