More than three million Australians have taken advantage of the Federal Government’s Super Early Release Scheme to date, withdrawing more than $33 billion from their superannuation savings.
Data from the Australian Prudential Regulation Authority (APRA) sourced from 175 regulated super funds shows there have been 4.2 million account withdrawals since the scheme started on 20 April, including 1.2 million repeat withdrawals.
In the first phase of the Government’s scheme, which ended on 30 June, around 3.1 million individuals financially impacted by the COVID-19 pandemic were able to withdraw up to $10,000 from their super account.
The second phase also allows eligible individuals to withdraw $10,000 from their super this financial year, up until the scheme is officially wound up on 24 September.
APRA’s collated data shows the average withdrawal payment to recipients since the scheme started on 20 April has been $7,683, and $8,452 for those making a repeat application.
The recontributions catch
A key feature of the Super Early Release Scheme has been that the individuals taking part do not need to pay any early withdrawals tax or include their received funds as income when lodging their next annual tax return.
But this allowance has potentially opened up the superannuation system to tax avoidance.
The Australian Tax Office is paying very close attention to potential avoidance where individuals have withdrawn superannuation funds and then recontributed those funds back into their super account to claim a tax deduction.
Under existing superannuation law, individuals can legitimately make after-tax contributions into super using their after-tax income. They are then entitled to claim a 15 per cent tax deduction in their next annual tax claim.
This is done by lodging a “Notice of intent to claim or vary a deduction for personal contributions” form when lodging their tax return.
After-tax contributions can be used in conjunction with pre-tax contributions up to the allowable $25,000 a year concessional contributions limit.
The issue with funds withdrawn through the Super Early Release Scheme is that individuals who recontribute funds they’ve pulled out of the superannuation system are effectively recycling money that has already received a concessional tax benefit when it was first deposited.
Clamping down on offenders
“Compliance remains one of our priorities to ensure the integrity of the tax and super systems,” the ATO says. “We will take action where people deliberately exploit the system.”
“We have seen some COVID-19 early release of super examples where people are doing the wrong thing.”
The ATO says while the early release scheme has been designed on a self-assessment basis when individuals make an application, it is monitoring activities such as recontributions by cross-checking information reported by super funds as well as superannuation tax deduction claims.
“Our compliance approach is based on ensuring that people have not exploited the COVID-19 measures,” the ATO says.
“Behaviours that attract our attention include withdrawing and recontributing super for a tax advantage.”
Potential consequences
Withdrawing your super early and then recontributing that amount back into your super fund and claiming a personal super contribution deduction can result in a range of tax outcomes.
The ATO says it is investigating some cases and may consider it appropriate to apply the general anti-avoidance rule for income tax (known as Part ivA).
“Whilst not all cases where an individual has recontributed an early release scheme amount will concern us, if you withdraw an amount for the main purpose of recontributing the released amount as a personal super contribution to claim a tax deduction, we may consider whether the arrangement would constitute a scheme in which we may seek to cancel any tax benefit.
“In the most serious cases these consequences can include penalties.”
Depending on your individual circumstances, this practice could also result in tax and superannuation implications including:
Excess contributions tax – you may need to pay additional tax if you exceed your concessional or non-concessional contributions cap.
Contributions tax – concessional contributions made to your super fund are taxed at the 15 per cent rate by your fund, impacting your eligibility for a super co-contribution.
Division 293 tax – you may need to pay additional tax due to your income and personal super contributions.
Is there are particular period of time that the ATO will be monitoring recontributions activity?
“There is not a particular time frame in terms of the ATO’s ongoing compliance activities,” the regulator says.
“This compliance activity will take into account the time an individual has to lodge their income tax return, as well as the time given to super funds to report contributions to the ATO.”
If you are considering recontributing back into your super account after withdrawing funds through the early release scheme, you should seek professional advice about the implications of doing so.
This advice should include the tax consequences for you and your super account to ensure there are no unintended outcomes.
Please contact us on Phone 1300 308 970 if you seek further discussion on this topic.
Source : Vanguard September 2020
Reproduced with permission of Vanguard Investments Australia Ltd
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