In most cases when helping SMSF trustees meet their obligations the breaches uncovered are relatively minor. There are however times when trustees regard their SMSF as a personal bank account and their actions can border on fraud and deception.
Several years ago I was asked to help the daughter of a client that had an SMSF set up by her husband. The purpose of the SMSF was not to provide retirement benefits but to provide a cash cow for the husband to milk. In this situation the wife became the innocent victim and lost all of her superannuation plus faced heavy penalties for numerous breaches of the superannuation and tax regulations.
The husband had approximate $50,000 in a superannuation platform and the wife had almost $80,000 in an industry fund. In a similar way to how property developers have recognised superannuation can be a source of funds for their activities, the husband had the SMSF set up and both lots of superannuation rolled into it.
After several dubious investments in 2011, when the financial health of the husband’s small business was becoming critical, my client was instructed to withdraw $70,000 in cash from the SMSF bank account. This was then deposited into husband’s business bank account in an attempt to keep it afloat. When the wife queried the legality of this with her husband she was told not to worry as he would find some dodgy accountant that would fix things.
Wrath of the ATO
After this first illegal access of superannuation funds, when there was insufficient income being generated by the business to fund the family’s lifestyle, the husband instructed the wife to regularly withdraw cash from the SMSF bank account to help fund the family’s lifestyle.
From the 2011 financial year until the wife came to see me in 2015 no accounts or income tax returns had been prepared for the SMSF. By this stage the bank account of the SMSF had been run down to less than one hundred dollars.
Knowing how harshly the ATO prosecutes early access of superannuation benefits, when in some cases wives are held accountable for the actions of husbands because of their joint trustee’s duties, I could see my client was possibly facing fines and a tax penalty of 46.5 per cent of her superannuation incorrectly withdrawn.
Thankfully she had an extensive document trail that showed the husband had clearly instructed her to make all withdrawals in cash personally from SMSF bank account, and evidenced her misgivings about the legality of what she was being asked to do.
After contacting a senior member of the ATO’s SMSF team, and making a full disclosure of what had occurred, I was advised to prepare accounts and tax returns for the SMSF for the 2011 through to 2014 financial years.
Trouble and strife for the wife
The amounts withdrawn were shown as illegal early release payments and the amounts included on the wife’s tax return. I had been advised by the person in the ATO that the amounts withdrawn should be taxed at the wife’s marginal tax rates rather than penalty taxes being imposed.
The tax impact of the amounts withdrawn was reduced by allocating $50,000 to the husband of the cash used for the business, with the balance of that year being allocated to the wife. As she was not working at that time no tax was payable in the first year of the incorrect accessing of superannuation.
The unfortunate postscript of sorting out the SMSF problems for the wife, despite full disclosure of all illegal early access and other superannuation breaches, was someone in the compliance section of the ATO decided that an audit should be conducted into the SMSF. This resulted in unnecessary cost and worry for the wife, plus a not unwelcome ban on her acting as trustee for an SMSF in the future.
