This data sharing is becoming increasingly comprehensive and sophisticated. So who should be worried?
Well, one of the ATO’s main targets is trustees using self-managed super funds (SMSFs) as tax-avoidance vehicles.
Tax-avoiding SMSF trustees in ATO sights
Acting ATO assistant commissioner Kasey Macfarlane spoke at the Chartered Accountants Australia and New Zealand National SMSF Conference recently warning that tax-avoiding SMSF trustees had a good chance of being caught.
“We increasingly have access to more and more sophisticated sources of data,” she said.
“We also share information across different government agencies and we will detect these arrangements.”
The tax-avoiding arrangements of SMSFs that Macfarlane referred to included dividend stripping and aggressive tax planning.
Where Macfarlane mentions “dividend stripping”, she is referring to the practice of SMSF members having their private company dividends channelled through their fund to pay no tax. This method utilises franking credits – tax credits on dividends for shareholders to stop company profits being taxed twice. As an arrangement, the private company distributes its franked dividends through the SMSF (when it is in the pension phase) instead of straight to the original shareholders so as to avoid paying tax.
The ATO is concerned that individuals, particularly SMSF members who are close to retirement (in the pension phase), are entered into these arrangements so that their dividends are exempt from income tax because they are supporting pensions.
Macfarlane said that although dividend stripping and other illegal tax-avoiding arrangements are adopted by a very small minority in the SMSF sector, they’re still a serious threat to the integrity of the system and action will be taken.
“SMSF trustees detected engaging in tax avoidance schemes should be put on notice that they are likely to face the possibility of being disqualified as trustees and/or potentially having the fund made non-complying,” she said.
She also revealed the ATO had already made moves against some SMSFs involved in dividend stripping.
“There are a number of these arrangements where [we’ve taken] compliance action,” she said.
“They’ve been reviewed by our general anti-avoidance review panel, which includes representatives from senior levels of the ATO as well as external representations, and we have concluded that all of those arrangements are not effective at law.”
SMSF trustees found to be in breach of tax law could face having to pay back any missing tax – with interest – and penalties.
Overdue SMSF tax returns? You may miss out on tax concessions
The sophisticated data sharing methods between the ATO with other regulatory bodies should light a fire under SMSF trustees when it comes to adhering to tax laws, including lodging SMSF tax returns on time.
As one particular SMSF trustee found out, overdue returns can land you with an unexpected tax bill.
For example, complying SMSFs are not liable to pay land tax if the total value of properties owned by the fund doesn’t exceed $406,000 in New South Wales or $250,000 in Victoria. Local state revenue offices can now check in with the ATO to see if a SMSF is up to date and has a complying status. But if you fail to lodge your SMSF tax returns on time, the local state revenue office is then unable to confirm your fund’s status as a complying SMSF. This means they can’t confirm your exemption from the tax. Thus, overdue SMSF tax returns can result in you being hit with land tax on land held in your SMSF.