Non-concessional contributions breaches on ATO radar

Deliberate efforts to game non-concessional contributions (NCC) cap breaches to reduce tax are known to the ATO, which will consider them as tax evasion.

Deliberate breaches of the non-concessional contributions (NCC) cap in an effort to reduce the amount of tax paid by an individual will be targeted by the ATO, which is aware of the practice, according to an SMSF technical expert.

Heffron senior SMSF specialist Alex Denham said quasi-recontribution strategies that aimed to convert taxable components to tax-free components were breaches of Part IVA of the Income Tax Act and the ATO was on the look out for them.

Denham made the comments as part of a webinar in which she pointed out many people were aware an excess NCC will result in an SMSF being requested by the ATO to release an amount that is equal to the excess contributions, which is returned to the member without being taxed, except for any associated earnings on the NCC.

“What is less known is that the amount released is a benefit payment, but it is not taxed as a benefit payment in the hands of the member and proportioning rules do not apply,” she added.

“Basically when the NCC is pulled out, depending on whether it comes from pension or accumulation, it is just an amount that comes out and the usual formula applies to calculate tax-free and taxable components.”

She said this could be used deliberately to avoid tax and gave the example of a pension account with a $1 million balance, which had a 50 per cent taxable component and a 50 per cent tax-free component and where a $200,000 NCC is removed.

“As soon as the income stream commences on that pension, the proportions of tax-free and taxable are calculated and in this case will be 50/50 as the balance fluctuates, but if the $200,000 is removed, the total balance is now $800,000 and what has been done in dollar terms is to reduce the taxable component to $400,000,” she said.

She highlighted that for an accumulation account with a $1 million balance the effect was even more pronounced because the release of the $200,000 would not change the $500,000 tax-free component, but would instead reduce the taxable component to $300,000.

“The ATO has said if SMSF trustees and members deliberately undertake this strategy, ‘we see you’, because that may be tax avoidance.”

She said if an SMSF trustee inadvertently went over their NCC limit and had to choose to have a refund come from an account with a taxable component, that was not a problem.

“But we are talking about deliberate schemes to get round these rules and flush that money out. That is actually what the ATO is looking for and considers a scheme breach of Part IVA,” she noted.

Jason Spits
February 27, 2020
smsmagazine.com.au