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Self Managed Super Fund (SMSF) Article
ATO review SMSF withdraw and re-contribution strategy

By Tony Negline.

This article may be out of date.

26th May 2004

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The ATO has warned that one of the most popular super strategies at the moment is under review.

The strategy involves taking a lump sum out of the super system and re-contributing it into the same, or another, super fund.  It is commonly referred to as “withdraw and re-contribute”.

The purpose of the strategy varies from person to person but invariably it’s done to improve the tax efficiency of retirement income streams (pensions or annuities) that will be paid once all the appropriate re-structuring has taken place.

In nearly all cases the strategies transactions are conducted either just before, or just after, retirement.

Despite its mainstream acceptance in financial planning circles, some people have expressed doubt about the legitimacy of the transaction from an income tax avoidance point of view.

Some take the view that there should only be one withdrawal and then one re-contribution for each taxpayer.  People who subscribe to this view argue that the maximum amount that should be withdrawn should not result in the Post June 1983 Tax Free Threshold being exceeded ($114,576 in the 2003/04 year).

This approach argues that withdrawals up to the Post June 1983 Tax Free Threshold are (obviously) tax free and so the net gain from the action is probably quite small but could produce some positive results especially where there is a reasonable level of Pre-July 1983 Service.

Others take a completely different view and argue that clients should be allowed to withdraw whatever they want from the super system.  The rationale for this view is that if a super fund allows a member to take any number of lump sums out of the system then what is done with those benefits when paid, is up to the individual who received them.

Upon each withdrawal the ETP system cranks into operation and deducts any applicable lump sum tax.  Additionally the RBL system is there to count any benefits to be taken and to apply no tax concessions when total counted benefits exceed an RBL.

This forceful interpretation of how the rules operate when taken to its full extent would allow an investor to take whatever sums of money out of super, including Undeducted Contributions, as often as they liked and then to re-contribute these sums into super.  Taking this argument to its logical extent would permit recently made contributions to be withdrawn and then re-contributed.

Regardless of these divergent views within financial planning land, the ATO’s Deputy Commissioner for Superannuation, Mark Jackson, said at a recent CPA Australia conference that he was extremely concerned about the widespread use of the strategy.

However Mr Jackson did say that it was difficult for the ATO to apply a view would cover every possibly tangent to the strategy because there are a number of different variants to it.

Mr Jackson also said that the ATO are particularly concerned about taking a lump sum out of the super system and then a few hours, perhaps even minutes, later contributing that money back into the super system.  (Some people don’t even bother to pay money out of their super fund’s bank account.  They simply “take” a lump sum and re-contribute by amending their super fund’s financial accounts.)

“In these situations, it would appear to us that Part IVA [the general anti-avoidance] rules would apply,” said Mr Jackson.

The ATO are much more comfortable with taxpayers who withdraw money from the super system because they have retired but after a period of time decide to return to work and at the same time decide to contribute the withdrawn amount from super.  Mr Jackson stressed however that the new employment would have to be “bona fide”.

The income tax anti-avoidance provisions can only be applied when the ATO prove that the dominant purpose behind a transaction, or series of transactions, is to obtain a tax benefit.

Other variants of the strategy, such as withdrawing a lump sum and then making a spouse super contribution with that money, are much harder to work through from an income tax anti-avoidance point of view.

Mr Jackson said that he expected the ATO to issue some further information in the not too distant future.

In the mean-time superannuation investors contemplating this strategy should think carefully before rushing into taking money out of super and re-contributing it into super.

Interestingly the catalyst for the ATO’s review of the withdraw and re-contribution strategy is the need to issue a Private Binding Ruling on the strategy for the first time.  This strategy has been around for more than 10 years and each year has become more popular.  It is surprising that it has taken so long for a taxpayer to approach the ATO looking for certainty on the strategies tax outcomes of the strategy.

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