Part IVA risk flagged with re-contribution strategy
SMSF practitioners have been told to provide clients with disclaimers when implementing any withdrawal and re-contribution strategies to warn them of the potential Part IVA risk.
DBA Lawyers director Bryce Figot said a lot of SMSF trustees will be looking to implement withdrawal and re-contribution strategies this year to try and equalise balances between members in order to maximise the $1.6 million transfer balance cap.
Mr Figot said while this is a very useful strategy, SMSF practitioners do need to watch out for the potential Part IVA risk.
“There is a dogma that Part IVA could never apply to withdrawal and re-contribution. I don't think that's true though, and people need to be aware of the fact that there are now many ways for Part IVA to apply to withdrawal and re-contribution,” said Mr Figot.
The idea that Part IVA can never apply to withdrawal and re-contribution, he said, comes from an ATO media release in 2004 which stated that the ATO would not seek to apply Part IVA to withdrawal and re-contribution strategies.
“However, if you reconsider the ATO's comments from 2011 when they were asked what the status of the media release was, they said [practitioners] shouldn’t put too much weight and certainty onto an old media release put out three commissioners ago essentially.”
The ATO also said at the time that it would be difficult to apply Part IVA to a re-contribution strategy where people are over 60 because they wouldn’t receive the tax benefit until someone died so it would be difficult to identify any tax benefit.
However, from 1 July this year, members using this strategy could receive a tax benefit far sooner, he said.
“So withdrawal and re-contribution is a really important strategy. However we need to think about Part IVA. Now there's not a huge Part IVA risk, but you can't definitely rule it out,” he said.
“Objectively, your purpose isn't for the tax benefit, but rather for the tax benefit of your spouse. However, you can't say that for sure, so we need to put in Part IVA disclaimers when taking about withdrawal and re-contribution and forget about that dogma that Part IVA doesn’t apply to withdrawal and re-contribution.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.