SMSF schemes

How to identify and avoid schemes

An SMSF is a trust run for the sole purpose of providing retirement benefits to its members. You must ensure your investments don't give you, your relatives or other related parties a present-day benefit.

Recognise these warning signs, especially in the following arrangements:

• illegal early release schemes that encourage people to set up an SMSF and use their super benefits for personal purposes
• tax avoidance schemes encourage people to channel money inappropriately into their SMSF to avoid paying tax.

Schemes have some common features, they:

• are artificial or contrived arrangements with complex structures around a new SMSF
• involve seemingly unnecessary steps or transactions
• invariably sound ‘too good to be true’ and they generally are.

Avoid making an investment that could result in illegal consequences by seeking financial advice from a registered financial advisorExternal Link in relation to setting up an SMSF or about investments.

Before establishing an SMSF, take time to educate yourself about the rules and responsibilities as a trustee, including reviewing our SMSF education products. You should also check the MoneySmart Investor Alert ListExternal Link to see if the investment or promoter has been flagged as a potential scam. Get independent valuations appropriate to the type of asset you're investing in.

Risks of entering into a scheme

Individuals may be targeted to start an SMSF or to use an existing SMSF in inappropriate and illegal arrangements, such as:

• to get a present day benefit for the individual or a different party
• to steal superannuation from the individual
• to convince someone to move their super from an APRA fund to an SMSF so that they can access their super before a condition of release is met
• to convince someone to invest their super money into a fraudulent investment.

You may risk losing some or all of your retirement savings and receive serious penalties if you enter into a scheme. You could also be disqualified as a trustee of your SMSF which could result in your fund being wound up.

Don't be tempted by 'too good to be true' schemes and risk your retirement savings. We encourage you to seek independent advice from a financial adviser who has no connection to the scheme before you commit to any arrangements.

You should consider how arrangements you enter affect your SMSF and whether they contravene the tax and super laws. A key issue in many SMSF's are transactions involving parties who are familiar to you and the consequences of not dealing on an arm's length basis.

Where you purchase business interests – whether they be property, a share in a business or similar structure, you should always check that your acquisition is at arm's length by getting an independent valuation at the time of the transfer.

Promoters of unlawful tax schemes

Anyone can be a promoter of an unlawful tax scheme. Some promoters will look for new ways to exploit the law or changes in the law. They will promote schemes to people and promise benefits that aren't legally available.

We actively monitor promoter behaviour and act against promoters through application of the promoter penalty laws.

Be aware of individuals who don't hold a financial license and promote themselves or on behalf of a business (that also doesn't hold a financial license). You should check the ASIC financial advisers registerExternal Link to make sure the person or business you are dealing with has a financial license. Tax agents must be registered with the Tax Practitioners Board (TPB). You can find a registered tax agent or check whether a person is registered by visiting the TPB website.External Link

Get ethical professional advice when planning for retirement. You should seek a second opinion from a trusted, licensed and reputable expert, especially if you are in any doubt.

How to report a promoter

If you think you’ve been approached by a promoter or caught up in a scheme, contact us immediately so we can help you.

SMSF schemes to watch out for

SMSF-related schemes of concern to be aware of:

• Property
• Illegal early access
• Non-concessional cap manipulation
• Dividend stripping
• Limited recourse borrowing arrangements (LRBA)
• Personal services income
• Mezzanine lending
• Asset protection schemes
• Asset valuations
• Multiple SMSFs
• Inappropriate use of reserves

Property

The following schemes relate to SMSFs and property.

Residential property purchased through illegal SMSF schemes

These schemes often target first home buyers wanting to enter the Australian property market to purchase a house and land package.

These schemes may be structured differently, but typically involve the:

• set up or use of an SMSF
• rollover of a member's super benefits from an existing fund to the SMSF
• SMSF investing in a property trust (an unrelated unit trust) for a fixed period and rate of return, being a contributory fund with other investors
• on-lending of money by the property trust to individuals to help them purchase real property, secured by mortgages over the property.

Once the investment is in place, the member gains access to money from a third-party entity to help finance the purchase of residential property under an arrangement commonly referred to as a 'loan'. Depending on the scheme, this money is used for:

• all or part of the deposit
• the balance of the purchase price
• costs related to the purchase.

In some cases, the money is also used to help consolidate the member's personal debts to help them secure a home loan.

In return for a high fee paid by the fund, the scheme promoter commonly helps by:

• establishing the SMSF and the property investment
• organising the purchase of the property, including the payment of the deposit and home loan.

These schemes are established and promoted to look like a genuine SMSF investment to help individuals purchase a home.

However, they often contravene one or more of the super laws, which may give us reason to view the SMSF as:

• a 'sham' and not a legitimate super fund
• providing a member with a current day benefit
• set up and maintained in a way that doesn’t comply with the sole purpose test.

The arrangement may also involve the:

• illegal early access of super benefits by members
• giving of financial assistance to a member using the resources of the fund
• provision of a 'loan' to a member to help them buy a home (if a genuine 'loan', will be an in-house asset of the fund).

To determine whether a scheme gives rise to a contravention of the super laws, we will take a 'look-through' approach and consider the arrangement as a whole.

If SMSF monies are used to help purchase a house for a member or a relative to live in through investments in other entities, this may be treated as illegal early access of super benefits. The amount may be included in the member's assessable income and taxed at their marginal rate, with the potential for tax shortfall penalties to also apply.

The trustee will have contravened one or more of the super laws and serious penalties may apply. The trustee may be:

• personally liable to pay an administrative penalty
• disqualified from acting as trustee.

If trustees are involved in a scheme like this, they should make a voluntary disclosure, see SMSF early engagement and voluntary disclosure service. We will take this into account when determining any penalties that may apply.

If you're approached by promoters or think you're involved in a scheme you can report it to us confidentially.

Personal rebates paid to members in property investment arrangements

Be cautious of property investment offers where part of the purchase price or deposit is returned to you personally. These schemes involve an SMSF purchasing property where part of the purchase price or deposit is rebated back to the members personally as an incentive.

These schemes may be structured differently but typically involve:

• the set-up or use of an SMSF, often with multiple related parties involved (such as advisers, tax agents, builders or property promoters)
• rollover of a member's super benefits from an existing fund to the SMSF
• the SMSF entering into contracts to purchase a property sourced by the promoter
• a separate agreement where a rebate of the deposit or purchase price is paid back to the members personally.

Members are often told they are entering into a property investment opportunity and may not be provided with adequate information about running an SMSF or their obligations as trustees.

In return for a high fee paid by the fund, the promoter may assist by:

• locating the investment property
• arranging the establishment of the SMSF or referring members to a third party to establish it
• organising the purchase of the property.

These arrangements might break superannuation laws and could mean people access their super too early, receive benefits they're not allowed to get yet, or cause the SMSF to fail the sole purpose test. This can lead to serious penalties for the trustees.

Trustees who become involved in these schemes risk significant penalties and regulatory action.

Related-party property development ventures

Property development done through joint venture connected to the SMSF can create large profits for the fund, especially when related companies do most of the work but don't charge proper market rates. This means the SMSF may receive more profit than is reasonable for the amount of money it actually put in.

Whilst an SMSF can invest directly or indirectly in property development ventures, extreme care must be taken.

Some arrangements can create major income tax and superannuation risks. These may include NALI rules being applied or breaking the rules about dealing with related parties.

In May 2023, we published a Taxpayer Alert (TA) on these types of arrangements and how we are actively reviewing them.

For more information, see:

• TA 2023/2 Diverting profits of a property development project to an SMSF, through use of a special purpose vehicle, involving non-arm’s length arrangements.
• SMSF Regulator's Bulletin SMSFRB 2020/1 Self-managed superannuation funds and property development.

Residential property purchased in a member's name

This is where an SMSF is set up to help members buy residential property in their personal name. These schemes often target first home buyers wanting to enter the property market.

Legal life interest of property

This happens when an SMSF member or other related entity grants a legal life interest over commercial property to a SMSF. This means the rental income diverted to the SMSF is taxed at a lower rate without full ownership of the property ever transferring to the SMSF.

Illegal early access

Illegal early access schemes encourage you to withdraw your super before you're legally entitled to.

Beware of people promoting early access schemes. They might tell you they can help you set up a SMSF to withdraw your super and use it to pay for personal expenses.

Non-concessional cap manipulation

This occurs when SMSF members deliberately exceed their non-concessional contributions cap in order to alter the proportions of taxable and non-taxable amounts within their superannuation account.

Dividend stripping

When shareholders in a private company transfer ownership of their shares to a related SMSF, the company can pay franked dividends to the SMSF and strip profits from the company in a tax-free or concessionally taxed form.

For more information, see TA 2015/1 Dividend stripping arrangements involving the transfer of private company shares to a self-managed superannuation fund.

Limited recourse borrowing arrangements (LRBA)

The following schemes relate to LRBAs.

LRBA and arm's length dealings

SMSF trustees undertaking LRBA and related party lending arrangements that are not consistent with a genuine arm's length dealing.

LRBA and intra-group lending arrangements

Any lending arrangements which involve an SMSF, whether directly via an LRBA or indirectly through an associated entity that can benefit an SMSF, must be on terms equivalent to those commercially available to people in similar lending circumstances.

Any variation of these terms may include but are not limited to:

• the risks being taken by the lender
• interest rates
• terms of repayment.

Increasing SMSF balances and profits to the SMSF through below-market value interest payments are of particular interest to the ATO when conducting reviews into non-arm's length income matters.

Personal services income

This occurs when an individual (with an SMSF often in pension phase) diverts income earned from personal services to the SMSF to be concessionally taxed or treated as exempt from tax.

For more information, see TA 2016/6 Diverting personal services income to self-managed superannuation funds.

Mezzanine lending

Lending by the SMSF with complex intra-group lending arrangements that provides both finance and asset protection. While the intra-group entities bear the risk, the SMSF receives all of the profit from the arrangement.

Asset protection schemes

Arrangements that claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust (known as a 'Vestey Trust') present a compliance risk.

A Vestey Trust is a discretionary trust established by deed. It is claimed that the trust is set up to acquire the equity in the SMSF’s assets through an equitable mortgage.

The mortgage is supported by a promissory note executed by the SMSF to the Vestey Trust. This recognises a debt is owed by the SMSF to the Vestey Trust. The mortgage is also supported by a caveat by the Vestey Trust over the SMSF’s real property. The arrangement can also allow a transfer of the SMSF’s cash holdings to a bank account in the name of the Vestey Trust.

Some asset protection schemes concern us because:

1. The arrangement is unnecessary because the super system already protects SMSF assets from creditors.
2. The arrangement is a compliance risk and may contravene one or more super laws. For example, it may
   • result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee
   • involve the ‘borrowing’ of money by the SMSF trustee
   • expose fund assets to unnecessary risk if it’s not clear who owns them
   • cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.
3. SMSF money can't be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets because these expenses are not incurred in running the SMSF.

If the arrangement contravenes the super laws, penalties may apply.

If trustees are involved in a scheme like this, they should make a voluntary disclosure. We will take this into account when determining our compliance action.

Asset valuations

Where asset valuations are not fit for purpose and are being applied to the intra-group transfer of assets. The assets are being transferred to the SMSF at lower values than they're worth.

Multiple SMSFs

Improper use of multiple SMSFs can become a compliance issue when additional funds are established to manipulate tax outcomes. For example:

• switching the respective funds between accumulation and retirement phase
• rolling over potentially tainted NALI funds into a new SMSF to avoid possible reviews and amendments by us.

Inappropriate use of reserves

Many existing reserves in SMSFs arose legitimately from legacy pensions that are no longer available. Consequently, there are limited appropriate circumstances where new reserves could be established and maintained in SMSFs. Structures using reserves designed to bypass super balance and transfer balance cap measures will attract our scrutiny.

For more information, see SMSF Regulator’s Bulletin SMSFRB 2018/1 The use of reserves by self-managed superannuation funds.