Illegal Early Access

Illegal Early Access to your Self Managed Super Fund

Illegal Early Access to SMSFThe Australian Tax Office (ATO) have noticed an increase in members illegally accessing super early before they have met a condition of release.

A large proportion of those schemes are related to individuals who establish new self managed superannuation funds (SMSF) with no real intent to continue running a SMSF. Loans to members and relatives of members are prohibited and are another way of accessing super early.

The ATO have launched a new program “the illegal early access estimate” to gather intelligence to measure the size, scale and risks of super monies being lost from illegal early access.

When can I legally access my Super?

You must satisfy a condition of release to legally access super. The significant trigger points are:

  • Turning 65
  • Reaching preservation age and retire

Preservation age is between 55 and 60 depending on when you were born. If you were born after 1 July 1964 your preservation age is 60. At the other end of the scale if you were born before 1 July 1960 your preservation age is 55.

Retirement is more complex as it depends on your age, ceasing gainful employment, your future intentions and if you continue to be employed. If you are over 60 and leave your current employment you will, generally, meet the definition of retirement. If you are under 60 and leave your current employment plus you do not intend to be gainfully employed in the future you will, generally, also meet the definition of retirement.  However, it is important to seek advice from your SMSF accountant or Licensed Financial Adviser to ensure you do meet the definition.

A member of a superannuation fund can legally access super early under certain circumstances including some of the following:

  • on compassionate grounds
  • due to severe financial hardship
  • due to a terminal medical condition
  • due to temporary or permanent incapacity

This article does not address the above, but you can access the ATO website for further information.

What is Illegal Access to my Super?

It is obtaining cash (or possibly assets) from your SMSF before you are legally entitled to it. It may be money used to go on an overseas holiday, buy a property, pay of personal debts or just money transferred to your own personal bank account where you control what happens to it.

Promoters of Illegal Early Access Schemes

The ATO recognise the influence by promoters of illegal early access schemes who target vulnerable people, often under financial stress or lack knowledge of the superannuation laws and regulations. The ATO continue to target promoters on an ongoing basis.

A promoter charges high fees and request your personal identification documents. Often the promoter will facilitate the establishment of a new SMSF and the rollover of super from other retail or industry funds to your new SMSF.

The promoter claims you can access your super from your new SMSF by rolling out your super to you personally.

If you do not meet a condition of release the rollover to you is illegal early access.

What if the Trustee Loaned money to me or another member of my SMSF?

Is the loan to a member a “loan” or is it illegal early access to super money  A loan to a member is a breach of the superannuation legislation which is generally rectified by repayment of the principal and interest.

The danger is the repayment of the money withdrawn from the fund may not automatically rectify the breach. If you cannot establish that the withdrawal was an intentional loan to a member the repayment will be a contribution to the fund which, depending on contribution caps and the member’s eligibility to make contributions, may trigger an additional breach or and possibly excess contributions.

A loan will be evidenced by a properly drafted loan agreement with arms length terms and conditions including regular repayments of principal and interest.

What if I simply made a Mistake?

There are times when money is withdrawn by mistake.

It is not uncommon for a trustee to pay a member expense from the SMSF bank account instead of from the member’s bank account. On the face of it, the withdrawal could be seen as early illegal access to super. If the trustee rectifies this as soon as becoming aware of it and can show it was an error the ATO will generally accept as the rectification of an error and not illegal access to super.

As there was no intent to make a loan to a member it is unlikely to breach the loan prohibition either. However, It is possible the auditor may breach the fund in relation to keeping SMSFs assets and cash separate to members regardless of the intention of the trustee.

Tip – Simply repaying monies illegally withdrawn will not automatically fix the breach as per the earlier discussion points  If it is repaid to the fund it can still be assessed as ordinary taxable income of the member and taxed at their marginal tax rate which will be the whole amount withdrawn including any tax free component.

What are the Consequences of me Accessing my Super Illegally?

  • Super monies illegally withdrawn will be taxed personally at your marginal tax rate.
  • If the ATO believes it is unreasonable to include it in your tax return, the ATO can exercise its discretion to exclude it.
  • Tax shortfall penalties and interest may also be applied.
  • Any fees charged by a promoter to illegally access super will not be an allowable tax deduction in your personal tax return.
  • Where you are disqualified as trustee you cannot continue as a member and have 6 months to transfer your benefits to another complying superannuation fund.
  • Alternatively the SMSF can become a small Apra fund by appointing a registrable superannuation entity licensee as a trustee allowing you to stay in the fund but you still have to resign as trustee.
  • Possible penalties for false and misleading statements if you provided fraudulent information to the ATO as part of a scheme.
  • Participating in a scheme could open you to identity theft and possibly lead to your super being stolen or even other crimes.

What are the Consequences of me as Trustee of my SMSF allowing Illegal Access?

  • Administrative penalties can apply to each trustee of the fund. Be aware this means you and the 2nd individual trustee can each receive the penalties, whereas if the SMSF has a corporate trustee the penalties are only applied once. Currently the penalties are $16,500 per trustee per transaction (increasing to $18,780 from 1 July 2024).
  • You will have to resign as trustee.
  • Illegal early access to super is often the critical element when a SMSF trustee is disqualified.
  • Your name is made public and shamed by being published in the Commonwealth Government Notices Gazette and entered on the trustee disqualification register.
  • Possible wind-up of the SMSF if none of the members can continue to act as a trustee.

How does the ATO know I have accessed my Super Illegally?

Red flags include the following:

  • Newly established SMSF.
  • Late lodgement of the first annual tax return for a new SMSF which is over 12 months late.
  • New SMSF which is a late lodger and made a rollover to a member of the fund.
  • Based on 2022 financial year, 16% of new funds failed to lodge their first annual return. Interestingly, a lot of those funds appear to have run out of money after paying a benefit to a member.
  • Existing funds who lodge late.

 Illegal Access to Super – Key Takeaways

  • The ATO is focussing on illegal early access to super.
  • The ATO will track money that leaves the super environment illegally even if it takes a few years so chances of being caught are high.
  • Late lodgement of a SMSF’s annual return is a red flag to the ATO.
  • Do not automatically repay the fund to fix illegal access to super.
  • Ensure a member meets a condition of release before paying benefits.
  • Be wary of promoters who offer early access to your super.
  • Do not give your identity documents to anybody unless you know they are a Licensed Financial Adviser or trusted SMSF Accountant.

Do you want to learn more about about Illegal Early Access of SMSF?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about Illegal Early Access of SMSF Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about Illegal Early Access of SMSF?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about Illegal Early Access of SMSF? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us