Thank you, Liz, and good morning everyone.
It’s always a pleasure to be a part of the Tax Institute’s Superannuation Intensive and have the chance to share with you what we’re seeing in the SMSF sector.
Now I’m sure you’ve heard we’ve recently announced the illegal early access estimate. This is a major new program which has received significant media coverage and I’ll provide more detail on this shortly – as first I’d like to cover some of the background to this.
We all know SMSFs are a long-term undertaking, they’re an investment for the future to meet members’ retirement aspirations. The most fundamental rule is, super is there for your retirement!
We have a mutual interest in helping trustees meet their obligations while they seek to achieve this. This is essential to maintain trust and confidence in the SMSF system.
Our data tells us the vast majority of SMSF trustees do swim between the flags, but it’s clear those that don’t have a significant impact on the system.
The ATO’s role as regulator is focussed on protecting the integrity of the system by ensuring SMSFs pay the correct amount of tax and operate for the sole purpose of providing retirement benefits to their members.
But I want to talk to you about today is the issue of greatest concern to us - illegal early access.
This is a serious issue as it impacts the integrity and reputation of the sector and as the consequences are significant, for the trustee personally and the broader community, we need to work together to make sure trustees are playing by the rules.
Starting a self-managed super fund is a choice an individual makes, in making this decision it comes with responsibility. You must play by the rules, and this includes not accessing super money early. ‘It’s your money, but not yet’ was the title of a previous ATO publication and this is exactly what trustees need to know from the beginning.
If trustees withdraw super illegally this can have a major impact on the member’s retirement savings which can lead to an increased reliance on taxpayer-funded pensions. For the member, there can also be significant financial impacts because illegally accessed benefits are assessable and penalties, interest, and disqualifications can also be applied.
I mentioned earlier that we’ve recently announced our program estimating the amount of money which has left the system before it should. This illegal early access estimate illustrates the extent and scale of this risk, which is a great measure of the health of the system.
Our findings revealed new funds were more likely to engage in this behaviour compared to established funds. Around two-thirds of the total retirement savings at risk relates to individuals entering the system with no genuine intent to run an SMSF.
What we found was $635 million of superannuation left the system illegally over a two-year period.
Specifically, for the 2020 year we estimate $380 million of super was illegally withdrawn by trustees. This figure would have been half a billion dollars if we hadn’t protected over $125 million from leaving the system via our new registrant risk reviews.
In the 2021 year, we estimate over $255 million of super was illegally accessed with an additional $170 million protected at registration.
While there was a decrease between the two years, we need to be mindful there will always be environmental factors which will impact the levels of compliance across the sector. For instance, in these years the pandemic and the subsequent stimulus payments are likely to have had an effect.
Preventative measures, such as our new registrant program also allowed us to protect an additional $42m in retirement savings from leaving the system in 2021 as compared to 2020.
While we can’t predict the results of future estimates, the level of illegal early access we’re identifying is still concerning and may be heightened in the current economic climate.
So, our estimate showed serious amounts of money being raided out of SMSFs each year and this doesn’t even include prohibited loans.
Prohibited loans are another concern for us because the rules don’t allow trustees to provide financial assistance to members and relatives or related parties where they breach the in-house asset rules.
In the two years of our analysis, we found SMSFs entered into over $200 million in loans each year. While the majority of these loans have been repaid it’s important to emphasise these arrangements are prohibited.
These estimates really highlight the seriousness of this issue. It’s important we all ensure SMSFs aren’t seen as a vehicle to access super illegally or to provide short-term finance.
So why are trustees doing this and how does it play out?
We know from our compliance work and other research, attitudes to super and lack of knowledge are key drivers, and we find many people who dip into their super illegally are experiencing some form of financial stress. The temptation to access retirement savings in accounts they control can just become too great.
For instance, we see new trustees who seek to enter the system with the sole intent of raiding their retirement savings before it’s legal to and this can often be facilitated by promoters charging a large fee.
A red flag for us is where new SMSFs have received a rollover and don’t lodge their first ever annual return. Currently 16% of funds registered in 2022 have failed to lodge their first return. 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 14,000 funds that for the first time have failed to lodge which have members who have not reached preservation age. Given their age and the fact that these returns are at least 9 months overdue, clearly indicates a heightened risk.
Finally, we see some existing trustees who continue to lodge but breach the operating standards and a contravention is reported to us by their SMSF auditor.
So far for the 2022 year, almost 34% of all reported contraventions indicate trustees may have inappropriately accessed their retirement savings by breaching payment standards, entering into prohibited loans with members and relatives, or not meeting in house asset requirements.
To address these risks, we deploy a wide range of strategies to prevent, detect and correct inappropriate behaviours. The approaches we take don’t stand still, they evolve and our ability to identify and deal with risks is becoming more sophisticated.
As we all know, Prevention is better than cure, so a core focus for us is providing support and guidance products, undertaking new registrant reviews, and removing SMSFs from superfund lookup where they fail to comply.
A key guidance product available on our website is a fact sheet titled, Accessing your super early may be illegal. This fact sheet helps individuals understand when a member can legally access their super, the likely consequences of them doing so and warns against the dangers of promoters. It has been translated into 19 languages and promoted extensively to employer, industry, and community groups.
We have a new guide in development, the Running an SMSF publication which complements the existing Starting and Winding-up publications, and it will be available on our website soon.
I’m pleased to advise we are also making good progress on the development of our new SMSF trustee education course, consisting of several online learning modules based on the lifecycle of an SMSF.
We risk assess all SMSF registrations to ensure trustees are entitled to set up a fund and are not simply doing so to illegally access their super. This program also acts as a safeguard against identity fraud.
Where trustees fail to meet their lodgment obligations, we withhold the SMSF’s complying status on SuperFund Lookup to restrict the fund from receiving rollovers and employer contributions.
Then for those that don’t respond to our warnings, we take corrective action and our compliance strategies have also been re-shaped and ramped up. This has resulted in record numbers of sanctions being applied.
If you illegally access your retirement savings, you can expect to be audited, and you are likely to be disqualified as this is a serious breach of your trustee obligations. Additional tax, penalties, and interest may also be applied.
What’s really sad is that often the trustee ends up worse off financially than they were before they took their super.
Let’s look at an actual case of someone we’ll call Bob. Bob was convinced to establish an SMSF by a cold caller claiming to be a financial advisor. He was told as long as he kept contributing to his super it was okay for some of it to be used for personal expenses.
Bob illegally accessed over $240,000 from his SMSF bank account. But after he paid the promoter and his tax agent and then the tax and penalties we raised as part of the audit, he lost over $100,000 - almost half the amount he withdrew. He was also disqualified.
Don’t let your clients be like Bob, remind them to always check who they’re dealing with before providing any personal or financial information. They must be especially cautious of anyone who contacts them with unsolicited financial advice. They should check ASIC's register to make sure they are dealing with licensed professionals.
Bob and in fact anyone we disqualify can never be a trustee of an SMSF again and their names are on the public record. This could come up in any background checks which can affect their personal and professional reputation.
So far for the first 6 months of the 2024 financial year we’ve disqualified 374 trustees. This compares to 751 disqualifications for the 2023 year.
Situations like Bob’s are becoming all too prevalent as we’re seeing an increase in the promotion of SMSF schemes and the financial impacts on the victims can be devastating. These promoters often target people in vulnerable communities and victims can be charged exorbitant fees, can lose all their retirement savings, face compliance actions and be exposed to fraud.
We continue to work with and share intelligence about promoters with other law enforcement agencies such as ASIC, the State and Federal Police and the Tax Practitioners Board. We have a number of investigations underway and more in the pipeline.
This is illustrated in a recent case where two men allegedly involved in a sophisticated SMSF scam, appeared in court charged with various criminal offences. These charges follow an ASIC investigation into suspected fraudulent investment websites that operated under various names. The website operators used the Australian financial service licence of two legitimate companies without their knowledge or consent.
Sanctions for scheme promoters can be severe and include the loss of professional licences, substantial additional tax, penalties, and criminal prosecution which can result in imprisonment.
So, what can professionals do to help?
There is so much that you can do. For starters given your professional standing in the community it means people pay attention to your perspective. What you say matters so in all settings take the opportunity to bust myths and help people understand when they can legitimately access their retirement savings.
There are also some specific ways you can help. For instance, the estimate revealed 66% of the total amount at risk related to individuals entering the system with no genuine intent to run an SMSF. With over 80% of SMSF registrations occurring with the support of a tax agent clearly you play a critical role in helping maintain the health of the sector.
When you directly interact with clients at the start of their SMSF journey, it’s important to steer them in the right direction. If it doesn’t look or feel right, ask them questions. Tell them the facts, make sure they know what they’re getting into. Do they understand what’s involved in running an SMSF and the law around when they can access their super?
Make them aware of the significant impacts of doing something illegal and the dangers of receiving and relying on incorrect advice. Point them to educational resources that are available like our free online SMSF publications.
We know that a range of professionals have raised concerns about what constitutes financial advice and rest assured ASIC has confirmed sharing factual information with your clients is not considered financial advice.
The illegal early access fact sheet we have developed provides a good foundation for this conversation.
For established funds, look out for warning signs which indicate your clients may need help in meeting their obligations. We often find where you’ve been able to support trustees to swim between the flags it provides them with a huge sense of relief and saves cost, time, and stress.
Non-lodgment and financial difficulties are a clear red flag a trustee might be veering into dangerous waters. If you see clients in this situation, reach out and remind them of their obligations and the rules particularly those relating to conditions of release and loans.
Where they have gone off track, I encourage you to use your insights and experience to help your clients resolve issues using our voluntary disclosure or lodgment deferral services. It is always better for your client to come to us before we come to them.
I’ve already mentioned the devastating impact promoters can have on individuals, and I am pleased to say we have continued to see an increase in the number of professionals reaching out to let us know about arrangements they are concerned with.
I’d encourage all of you to help us stamp out this behaviour and protect more victims from being caught up in these schemes. You can do this by reporting information to us using the tip off form on our website.
Wrap up
In wrapping up, I want to leave you with three key messages:
• Firstly, it is not acceptable for hundreds of millions of dollars of retirement savings to be raided out of SMSFs each year.
• Secondly, it is important to recognise this is the most significant risk for the SMSF sector as it impacts the financial welfare of the individuals involved and puts pressure on taxpayer funded pensions.
• And finally, as professionals you’re influential and have a critical role to play in helping address this issue.
Thank you. Liz, I will hand back to you now for some questions.