SMSF practitioners have been cautioned by the ATO on the dangers of promoting illegal tax schemes, with some advisers putting themselves at risk of prosecution by inadvertently recommending these schemes to clients.
The ATO announced yesterday there has been a recent increase in the number of illegal tax schemes, particularly those targeting individuals approaching retirement. It said it has launched an initiative aimed at identifying promoters of these schemes.
Following the announcement, an ATO spokesperson told SMSF Adviser some of these arrangements may appear to comply with the law at an initial glance when they are in fact illegal.
“We recognise that the vast majority of advisers provide excellent service to protect their clients’ interests and we don’t want to see them inadvertently advising their clients to enter into these schemes and putting their [clients’] retirement nest eggs at risk,” the spokesperson said.
“We want to ensure that SMSF advisers and accountants are aware of the dangers of these schemes and are in the best position to prevent their clients from making ill-informed decisions that will adversely impact their future.”
According to the ATO, dividend stripping arrangements are one of the main schemes being operated.
This involves shareholders in a private company transferring ownership of their shares to an SMSF, so that the company pays dividends to the SMSF, with the purpose of stripping profits from the company in a tax-free form.
The ATO said it is also concerned about non-arm’s length limited recourse borrowing arrangements where an SMSF trustee undertakes a borrowing arrangement with terms that are not consistent with an arm’s length dealing.
Personal services income schemes are another worrying example, where individuals divert income earned from personal services to an SMSF where it is concessionally taxed or treated as exempt from tax.
ATO deputy commissioner Michael Cranston reminded practitioners on the consequences of recommending any of these schemes to SMSF clients.
“Promoters of retirement planning schemes may incur significant punishment including prosecution, and where intermediaries are found to have been encouraging clients to adopt these arrangements, the ATO will consider the application of the promoter penalty laws. The ATO may also consider referring the matter to the Tax Practitioners Board,” Mr Cranston said.
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