Expert slams ATO’s crackdown on DIY super fund trust arrangements

A tax expert has attacked the Australian Taxation Office’s decision to crack down on trust arrangements used by self managed super funds to avoid paying penalty taxes on excess contributions.

A number of law firms and advisory firms for self managed super funds offer to arrange the trust structures on behalf of clients. The structures divert funds which would have exceeded the contribution cap into a separate fund, thereby avoiding the 93% penalty tax.

But tax commissioner Michael D’Ascenzo says these arrangements are specifically designed to dodge existing rules and the ATO considers these trusts as a type of tax avoidance.

“These clauses are an attempt to avoid the excess contributions tax if they exceed the relevant cap, even though the amount in question was clearly intended as a contribution as treated as part of the super fund by the trustee,” he said in a statement.

“The ATO has reviewed these arrangements and considers that they are ineffective. The member may still have to pay excess contributions tax on these amounts, even if the trustee repays the amount back to the member.”

The trusts are designed so the person paying money into the fund does not have to worry about going over the contribution caps, and thereby paying the 93% penalty tax.

Currently the contribution caps sit at $25,000 per year for people under 25, and $50,000 for people over 50, as per the changes introduced by the Federal Government last year.

D’Ascenzo also said in the statement that members “may also have to include the amount repaid to them (by the separate fund) in their assessable income for the year”.

“Anyone involved in or considering these arrangements should be aware that they face close examination by the ATO.”

But Daniel Butler, head of DBA Lawyers, says there is nothing wrong with the trusts and they have been part of the DIY super fund scene for a number of years.

“This is a complete blow out, and it’s like cracking a chestnut with a bulldozer. This is an early warning trying to scare the market, and it isn’t fair because it isn’t appropriate. There is nothing wrong with these trusts at all.”

“When you have a solid legal foundation, which the ATO conveniently disagrees with, they go to the courts. And this has not been taken up in this matter, it’s been taken up in the form of a statement.”

Butler says law firms arranging the trusts have done nothing wrong, and the arrangement is a popular one. If the ATO wants to dispute the long-standing rule, he says, it should go through the proper channels.

“This is absolutely nothing new, it’s not a scheme, it’s how people draft a deed and it’s not like they are gaining huge amounts of funds by drafting these extra provisions. It’s a popular feature in most deeds, there is nothing unusual about it.”

“There is a correct avenue in order to dispute the validity of the trust deed, and it is not a taxpayer alert. Firms are just supplying what most people want by giving out a prudent set of tools.”