Justin Micale, Assistant Commissioner, SMSF Regulatory
Speech at the CAANZ National SMSF and Financial Advice Conference
9 November 2023
(Check against delivery)
Introduction
Good morning, everyone.
I know many of us have come a long way to be here today. I have travelled from the other side of the country to be in the beautiful Hunter region amongst the vineyards.
Speaking of vineyards - if you think about it, vines and SMSFs have much in common. Vines require nurturing to grow, and they are a long-term undertaking and investment for the future. This is similar to the way in which trustees need to nurture, care, and pay attention to their SMSF.
Not everyone has the skills and knowledge to make great wine (but fortunately some do). And in the same way, not everyone is equipped to be an SMSF trustee. Clearly, navigating an SMSF can be challenging and it’s fantastic we have so many engaged professionals like yourselves committed to supporting trustees.
We have a common interest in helping trustees meet their obligations which is an essential ingredient in maintaining trust and confidence in the SMSF system.
The ATO’s role as the regulator is focussed on protecting the integrity of the system by ensuring funds pay the correct amount of tax and operate for the sole purpose of providing retirement benefits to their members.
This role is not a prudential one as members of the fund are also its trustees and as such are in a unique position to protect their own interests – it is why the word ‘self’ is such an important part of the SMSF equation.
Today I am going to talk to you about:
- what we’re most concerned about and why
- what we’re doing to address this, and
- what you can do to help.
Illegal early access − our key focus
Whenever I attend functions like this, I am often asked what is the ATO most concerned about?
Well let me start by saying, our data tells us the vast majority of SMSFs are doing the right thing, but those that don’t are having a significant impact on the system.
The issues we are most concerned about remain consistent. We have a strong focus on regulatory breaches and tax planning arrangements which inappropriately reduce the tax payable of individuals and entities associated with the fund. The Tax Avoidance Taskforce monitors and investigates inappropriate tax planning arrangements involving SMSFs.
This is not what I’m here to talk to you about today because our greatest area of concern is illegal early access.
When someone does something wrong with their SMSF it invariably involves them accessing some or all their retirement savings before meeting a condition of release.
Now I know you might have heard me talk about this before, but I’m here to tell you this is a major focus for the ATO. It is clearly in all of our best interests to get on top of this as the consequences are significant and have the potential to impact the integrity and reputation of the sector.
For instance, early withdrawal of super seriously impacts a member’s retirement savings which can lead to an increased reliance on taxpayer-funded pensions in the future. There can also be significant financial and regulatory impacts for individuals as illegally accessed benefits are assessable and penalties, interest and disqualifications may be applied.
In a major development in this area, I am sure you will be very interested to hear we have a new program in place which will allow us to estimate the amount of money leaving the system before it should. This program known as the illegal early access estimate will allow us to determine the size, scale and trajectory of this risk as well as gather intelligence to assist us in addressing this issue.
It is too soon to share any findings, but we are intending to publicly release this estimate in early 2024. This is our first attempt at measuring the amount of money inappropriately withdrawn by trustees who manage their own super. And being the first time we have done an estimate of this type, this is sure to put this issue in the spotlight.
So why are SMSFs doing this? We have found through our compliance work and other research there are a range of reasons why individuals access their retirement savings before they are legally entitled to.
I found it interesting to read results from research undertaken by the financial product comparison website Finder, which suggests 56% of Australians would raid their super if they were allowed to.
We also know from our own research that one third of existing trustees lack the capability or don’t take responsibility for managing their SMSF. So clearly community attitudes to super and lack of knowledge are key drivers.
Having said this, overwhelmingly we find most people who dip into their super illegally are experiencing some form of financial stress.
We are often confronted with individuals and business owners dealing with cash flow problems, cost of living pressures, relationship breakdowns and debt. In these circumstances, the temptation to access retirement savings invested in accounts they control and have direct access to, often becomes too great.
In the current economic climate where more individuals are facing increased levels of financial stress, illegal early access is something we need to be even more mindful of.
How illegal early access happens
So how does illegal early access play out?
Well, we see it play out in several ways and at any point of the SMSF lifecycle.
Firstly, far too regularly, we identify new trustees who enter the system with the sole intent of taking all their retirement savings before they’re entitled to. This is often facilitated by promoters who usually charge a large fee.
A key marker for us is where newly established SMSFs have received a rollover but have not lodged their first ever annual return. Currently 17% of the 28,000 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. This suggests they may have deliberately entered the system to illegally access their super.
We also know some existing trustees inappropriately access their super early and stop lodging to avoid detection.
For the 2022 year, there are around 32,000 SMSFs with members that have not yet reach preservation age, that for the first time have failed to meet their lodgment obligations. While there may be legitimate reasons for these delays, this group certainly presents with a heightened level of risk.
Finally, we see some existing trustees who continue to lodge but have breached the operating standards and a contravention is reported to us.
So far for the 2022 year, we have received around 11,500 auditor contravention reports including 20,000 contraventions. Almost 35% of these contraventions suggest trustees may have inappropriately accessed their retirement savings by breaching payment standards, entering into prohibited loans with members, relatives or related entities.
How we tackle illegal early access
So, what are we doing about this?
To address this risk, we deploy a wide range of strategies. Our approach is agile, tailored and continues to adapt and evolve, some of what we’re doing now may be familiar to you, some of it is new and some of it has been expanded.
A core focus of our strategy is to prevent this behaviour by providing support and guidance products, undertaking new registrant reviews, and removing SMSFs from superfund lookup where they have failed to comply.
For instance, we continue to build on the SMSF publications available on our website to support trustees with meeting their obligations in the different stages of their SMSFs lifecycle.
Another product we released earlier this year is a fact sheet which helps individuals understand when a member can legally access their super and warns against the dangers of promoters.
It has been translated into 19 languages and promoted extensively to employer, industry, and community groups. You can find the factsheet, titled Accessing your super early may be illegal, on our website.
We are also developing a new trustee education course. It will consist of several online learning modules focused on the lifecycle of an SMSF. The development is well underway, and we hope to go live with this product in the new year.
Our new registrant reviews involve the risk assessment of all SMSF registrations to ensure trustees are entitled to set up a fund and not simply doing so to illegally access their super. This program also acts as a safeguard against identity fraud. We estimate this program has protected $64 million in super monies from leaving the system during the 2023 financial year.
Where trustees fail to meet their lodgment obligations, we also 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 heed our warnings, we have our compliance strategy.
In recent times, this strategy - like many aspects of our business - has been reshaped and scaled up with a particular focus on slowing the growth of illegal early access in the sector.
In doing so we have increased the sophistication of our risk detection models and use of intelligence gathered in auditor contravention reports, to put in place a broader range of differentiated and more timely compliance actions.
This has resulted in a significant increase in the number of sanctions being applied. If your clients are illegally accessing their retirement savings, they can expect to be audited, and are likely to be disqualified as this is a serious breach of their trustee obligations. Additional tax, penalties and interest may also be applied.
In the 2023 year we disqualified 753 trustees, which is triple the previous year, and raised around $29 million in additional tax, penalties, and interest. Illegal early access was by far the most common reason for these compliance outcomes.
Those we disqualify can never be a trustee of an SMSF again and their names are on the public record forever, for all to see. This may come up in any background checks and affect their personal and professional reputation.
A new initiative is our first-time non-lodgers program.
This program involves us identifying and taking action against funds that haven’t lodged their first annual return, where a member has made a rollover. We send them a letter advising if they have illegally accessed their super, they need to include the amount withdrawn in their personal income tax return.
If your client receives one of these letters they should respond immediately because if they don’t the consequences are likely to be more significant and involve additional tax, penalties, interest, and disqualifications being applied.
I talked about our 3 strikes strategy for professionals at the last conference. I explained we expected tax agents, auditors, and financial advisers to display a higher standard of tax and regulatory compliance in running their own SMSFs.
This work is progressing, and we are now taking firmer compliance action with professionals who ignored our warnings. These actions have identified professionals who have not only failed to meet their lodgment obligations, but surprisingly have illegally accessed significant amounts of super.
This behaviour is unacceptable and has resulted in us raising assessments, applying significant penalties, disqualifying trustees, and referring them to other regulatory bodies for further investigation.
We are also stepping up our focus on promoters, as we’re seeing an increase in illegal early access 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, lose all their retirement savings, face compliance actions and be exposed to fraud.
We receive intelligence about people who may be involved in these schemes from various sources. Schemes can vary from simple to more sophisticated arrangements involving investments in property trusts who then on lend money to the member to help them purchase their home.
I’ve even been told about a situation where a promoter was at a casino spruiking that he would help people set up an SMSF so they could access their super to pay for their gambling.
We employ sophisticated data analytics to identify, monitor and investigate promoters. This includes the scrutiny of fund registrations where they may be associated with promoters on our watchlist.
We currently have investigations underway and continue to work closely with other law enforcement agencies such as the State and Federal Police, ASIC and the Tax Practitioners Board to share intelligence and address inappropriate behaviours. The sanctions that apply can be severe and include the loss of professional licences, substantial penalties, and criminal prosecution.
I am sure you have seen articles about promoters who have encouraged trustees to illegally access their super or tricked them into investing in fraudulent products.
As an example, there has been the recent sentencing of a financial adviser who stole $10 million from SMSF clients over 5 years. He was sentenced to almost 10 years jail and was banned from providing financial services for life. ASIC also banned a Gold Coast director for 8 years from providing financial services for promoting an illegal early access scheme.
What you can do to help
As I have said before, to maintain the integrity of the system it is in our best interests and yours for us all to address illegal early access.
You have a critical role in helping us maintain the health of the sector by ensuring individuals enter and remain in the system for the right reasons.
So how can SMSF professionals play their part in addressing this risk?
As a trusted professional you have a pivotal role in supporting trustees with navigating their SMSF and meeting their obligations.
We know for instance over 80% of people who register an SMSF do so with the support of a tax agent. This presents you with a great opportunity to engage directly with clients at the start of their SMSF journey by gaining an insight into their specific circumstances and steering them in the right direction.
For some, this may simply involve providing them with advice on when they should seek support from licenced professionals and to point them to educational resources that are available.
For others, if the registration of an SMSF doesn’t look or feel right for your client, have a conversation with them, plant the seed – do they really understand what they’re getting into, the law around when they can access their super, the significant impacts of doing something illegal and the dangers of receiving and relying on incorrect advice?
The fact sheet we have developed that I referred to earlier provides useful information and a good foundation for this conversation.
What about those who are already in the system?
Supporting your clients helps them, helps you and helps us. So, look out for warning signs and encourage them to improve their understanding of the rules, particularly those relating to conditions of release and loaning money to members and related parties.
It’s important to realise illegal early access and non-lodgment often go hand-in-hand. You also need to be watchful of clients who appear to be running into financial difficulties.
These are clear red flags that a trustee may have veered off track. I know it can be difficult to engage with clients in these circumstances but your support in helping them meet their key obligations is critical.
We often find where you’ve been able to support trustees to get back on track it provides them with a huge sense of relief and saves the cost, time and stress that may arise from ATO compliance actions.
In practical terms, this may involve you connecting with your client and using your insights into their circumstances to help bring a resolution. This may require you to make use of our voluntary disclosure or lodgment deferral services.
If you have a client who has gone off track it is always better for them to come to us before we come to them. They should make a voluntary disclosure using the approved form on our website. We will take this into account when determining what sanctions to apply.
I’ve already mentioned how concerned I am about the impact promoters can have on individuals, and this is an area we need your help with.
In your daily interactions with clients, you hear first-hand about the reasons why they’re setting up an SMSF or investing in particular products. So please help us stamp out this behaviour and protect the victims by reporting promoters of schemes to us.
If your clients have been approached by anyone suggesting they can withdraw their super early, they should stop any involvement with the promoter, make sure they don’t sign any documents or provide them with their personal details.
A final thought
In wrapping up, I’d like to reiterate that when we release the illegal early access estimate it will help us all, as it will provide a greater level of understanding of the extent to which certain behaviours are driving this risk and its size, scale, and trajectory.
That said, we can’t wait, we need to act now! Together we are custodians of the system, so we need to continue to build on how we address, what is clearly the most significant risk in the sector.
The questions I have for you are, ‘Are your clients on track?’, ’Is there anything else we can all do to maintain the integrity of the system?’
Thank you.