ATO targets illegal SMSF withdrawals

Illegal withdrawals totalling more than half a billion dollars have been made from self-managed super funds (SMSFs). The Australian Tax Office said funds totalling $637 million were illicitly withdrawn by trustees over the 2019/20 and 2020/21 financial years.

Speaking at last month’s SMSF Association conference, deputy tax commissioner Emma Rosenzweig revealed the full scale of the breaches. “We have found for the 2019/20 year an estimated $381 million of super has been illegally withdrawn by trustees of SMSFs,” Ms Rosenzweig said. The following financial year – 2020/21 – another $256 million was accessed illegally, she said. 

As high as those figures were, they could have been higher still. Ms Rosenzweig said the ATO’s new registrant program had protected over $125 million from “leaving the system” in 20219/20. In 2020/21, another $170 million was “protected at registration”.

How and why are these illegal SMSF withdrawals happening?

While there’s likely a proportion of the SMSFs knowingly making illegal withdrawals, one expert believes there’s confusion about access rules. This, he says, is resulting in trustees unwittingly breaching the rules.

Colonial First State head of technical Craig Day outlined his explanation at the recent SMSF Association national conference in Brisbane. He said the majority of breaches reported were loans to members or the provision of financial assistance to members. These made up 19.7 per cent of contravention reports, he said. 

Mr Day then outlined the likely thought processes of those making the illegal withdrawals. The first was a simple misinterpretation of rules: “Why is this the most common breach? First of all, I think [it’s probably due to] a misunderstanding of the rules.”

The second driver was the ‘my money, my choice’ idea: “The concept of ‘this is my money’. [Trustees most likely think:] ‘It’s my money, I’ve got the school fees that need to be paid, I’ll have that $2000 at the end of the month. Why can’t I just take that [sum] out of the fund’s bank account and put it back in at the end of the month? It’s my money.’”

Prevention and redress

The introduction of the ATO’s registrant program in 2022 has already prevented a significant amount of funds being withdrawn. Ms Rosenzweig also noted a trend that newly established SMSFs were more likely to engage in illegal early access.

Ms Rosenzweig said: “We continue to see many new trustees entering into the system with the sole intent of raiding their retirement savings, sometimes facilitated by promoters charging a large fee.” As a result, the ATO will be doing targeted auditing of newer funds to reduce the risk of further breaches. 

Additionally, Mr Day says advisers can help prevent these types of compliance breaches. This can be achieved, he said, by learning to recognise signs indicating SMSF trustees might be considering illegally accessing superannuation. An “unexpected liquidation of fund assets”, Mr Day said, was one such sign.

Ms Rosenzweig said the ATO had updated its support and guidelines to assist trustees in preventing accidental breaches.

Are you an SMSF trustee? Were you aware of the complexity of the rules surrounding withdrawals? Let us know via the comments section below.

Also read: How to build an SMSF using ETFs

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