SMSFs warned over ATO discretion on early access benefits

“Even though this constitutes a breach, if the amount is repaid quickly with interest, and it’s the first time it’s happened there will generally be no consequence,” he said.

“If inaction and the passage of time demands it be processed as a benefit payment, then it will be included in the member’s assessable income and taxed as ordinary income. 

Mr Busoli noted the ATO could exercise discretion to allow concessional tax treatment, but this is unlikely for an SMSF member payment due to the level of control the member/trustee has over the fund’s transactions. 

A bank error could provide a reasonable cause; however, the trustees would be expected to have noticed it in a reasonable time frame.

Notably, the ATO’s practice note states that factors, where the individual is suffering financial hardship or distress at the time they received the benefit, will have little or no weight when deciding whether to exercise the discretion, Mr Busoli explained. 

This also applies if the member has attempted rectification by repaying the amount as a contribution.

“Though extra taxation is a deterrent it would not be widely effective unless other consequences, such as disqualification of the individual from being a trustee/director and administration penalties, were not also applicable,” Mr Busoli warned.

“The bottom line – don’t do it!”

This comes as the ATO has recently published a draft Law Administration Practice Statement, PS LA 2021/D3, which explained when and how the ATO would apply discretion in section 304-10(4) of the Income Tax Assessment Act 1997 where a taxpayer receives a superannuation benefit in breach of the legislative requirements. It is currently under consultation and, when finalised, will be used to instruct ATO staff. 

It has also published a draft tax determination, TD 2021/D6, which clarified the tax treatment of a superannuation benefit where a commissioner exercises the discretion in subsection 304-10(4).