With eligible individuals able to withdraw $10,000 from their super in the 2019–20 financial year, and a further $10,000 from 1 July, a tax expert has warned that sole traders taking advantage of the scheme could potentially land in hot water with the ATO.
Dr Rob Whait, founder of UniSA Tax Clinic, explained that while the ATO has the power to stop individuals exploiting the measure to generate a tax advantage, sole traders could become the unintended victim.
The scheme making rounds in the community involves making two separate super contributions of $10,000 each, before tax, followed by two tax-free withdrawals of $10,000.
Dr Whait explained that the tax benefit comes from the 15 per cent tax on salary sacrificed super contributions and the eventual tax-free early super release.
“Since contributions to super are generally taxed at 15 per cent, providing no relevant contribution limits have been reached, and withdrawals from super are tax-free, this scheme can significantly reduce the overall tax paid,” he said.
Dr Whait clarified that while a person engaging in this scheme may superficially meet the criteria for early access and be fully compliant with the letter of the law, it may be regarded as tax avoidance.
He warned that it won’t take long for the ATO to pick out tax avoiders, but he questioned the repercussions on sole traders.
“The rule preventing taxpayers from accessing benefits from such a scheme has been around for a long time and was designed broadly to capture schemes that haven’t even been thought of yet and it lies in wait for them, ready to strike,” Dr Whait said.
“But many sole traders usually make their super contributions towards the end of the year and it may appear, to an outsider, that they are engaging in the scheme when they are not. So, for those who have had a 20 per cent reduction in income and genuinely meet the COVID-19 criteria, how can they then make their annual super contribution without appearing as though they’re rorting the system?”
He explained that in order to show that no tax avoidance had occurred, sole traders could be asked to demonstrate that similar contributions were made at the end of prior years.
“Once COVID-19 has settled down and normality returns, we can expect the ATO to begin investigating various abuses of tax laws including potential tax avoidance,” Dr Whait said.
“The ATO has up to four years from the issuing of a tax assessment to investigate and issue an amended assessment if it believes tax avoidance has taken place.
“Since the ATO is administering various aspects of the stimulus, it knows what people are doing and has data about it. The ATO also has broad powers to collect any other data that it needs. Since this scheme has been discussed in the community, the ATO may take special interest in it.”
He concluded that anyone in doubt should seek professional advice.