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Self Managed Super Fund (SMSF) Article
Withdraw & Re-contribution Strategy Given All Clear
By Tony Negline.
This article may be out of date.
18th August 2004
Last week the Australian Taxation Office issued a Press Release which gives all retirees some great news.
The Press Release announces that the ATO have reviewed the so-called “withdraw and re-contribution” strategy. The ATO has decided that the strategy, in most cases, is not as bad, from a potential tax avoidance point of view, as it had implied it might be over the last sixteen years. Prior to this announcement the ATO had consistently said that it was concerned about its widespread use and thought that a taxpayer’s motives might be to avoid tax.
The strategy involves taking a lump sum out of superannuation and then contributing the identical, or very similar amount into the same, or another, super fund. Couples sometimes withdraw money from one spouse’s super account and contribute the net of tax amount into the other spouse’s super account.
The purpose of the strategy is often to improve the tax efficiency of super annuities or pensions which will be paid to retirees. The strategy is also sometimes done to improve the tax efficiency of future lump sum withdrawals from the super system.
The strategy is very common. Within most large funds hardly a day would go by when at least one withdraw and re-contribution transaction is not being overseen through the fund’s administration system.
The ATO’s Press Release says that it has examined a number of “straight-forward” withdraw and re-contribution strategies and decided that the general income tax anti-avoidance provisions don’t apply to such arrangements. The ATO acknowledges that such arrangements are allowed by the law and are done “to maximize an individual’s retirement benefits”.
In the same Press Release, the ATO also said that the general anti-avoidance rules will not apply where a taxpayer makes a large undeducted contribution to their super fund before they withdraw monies from that fund and the effect of that undeducted contribution is to reduce the amount of lump sum super tax payable.
A spokesperson from the ATO told Wealth that last week’s Press Release effectively repudiates a very old tax ruling which the ATO issued in April 1987. This tax ruling, IT 2393, which although very old had been the subject of much debate within the financial services industry since it was released. Some thought this ruling meant that if a retiree wanted to make a super contribution just prior to retirement then that contribution would have to be made up to six months before the retiree wanted access to their retirement monies. Others took a more liberal approach and thought it meant three months. And there were other interpretations especially when a retiree intended to use the contribution to provide a pension.
There is no doubt that the ATO’s previous announcements have made retirees unsure of what they should and should not do. Some retirees have accepted a second best solution to their retirement income arrangements because they didn’t want to incur the wrath of the ATO.
As a result of last weeks announcement those retirees may find it profitable to revisit their retirement income arrangements to determine if they should consider engaging in more or additional “withdraw and re-contribution” strategies. The benefits of unwinding current arrangements will very much depend upon the transaction costs as well as the size of any tax benefits. Clearly good advice will be essential as restructuring retirement incomes can be particularly complex and one wrong move can lead to unintended tax penalties.
Retirees should be warned that the ATO has not said that they are dropping all their concerns about the “withdraw and re-contribution” stratregy. The Commissioner of Taxation is quoted in last weeks Press Release as saying, “We would of course need to consider our position were we to find examples of arrangements contrived to meet eligibility requirements in form but not in substance,” Mr Carmody said.
It is unclear what contrived arrangements are but hopefully this will be revealed in a Public Ruling which the ATO has said that it intends to issue at some stage about this strategy. Based upon past experience we believe that this ruling may not be finalized for at least six months. It may take much longer. Some tax rulings haven’t been finalized for many years. Hopefully this will not occur on this occasion.
Perhaps one contrived arrangement that the ATO won’t like is taking a lump sum out of super and contributing it back into the same fund more than once. (In theory this strategy when used correctly can eliminate a retirees Post June 1983 component and leave the retiree with Pre July 1983 component and undeducted contributions.)
If a retiree is unsure about their particular circumstances and they are looking for certainty in their planning arrangements then they should seriously consider getting an ATO Private Binding Ruling.
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