COVID-19 early release super – integrity and compliance

The Australian Taxation Office (ATO) is available to help and assist those who are doing the right thing. They will make it as simple as possible for eligible people in the community who need to access their super early to deal with the adverse economic impact of COVID-19.

Compliance remains one of their priorities to ensure the integrity of the tax and super systems. The ATO will take action where people deliberately exploit the system.

Non-compliance

The ATO has seen some COVID-19 early release of super examples where people are doing the wrong thing. In some cases, they have stopped applications and prevented super money from being released. In other cases, they review circumstances after an application has been processed to ensure the integrity of the program.

The ATO has a variety of data sources that allow them to check for claims made incorrectly. This includes:

  • Single Touch Payroll (STP)
  • income tax returns
  • information reported to them by your super fund
  • third party data from agencies including:
    • Services Australia
    • Home Affairs.

What might lead to a claim review

Through STP the ATO has real-time information to tell them whether people are employed and how much they are being paid. Their compliance approach is based on ensuring that people have not exploited the COVID-19 measures. Where they have concerns that claims are not genuine they will review the claims.

Behaviours that attract the ATO’s attention include:

  • applying when there is no change to your regular salary and wage or employment information
  • artificially arranging your affairs to meet the eligibility criteria
  • making false statements or fraudulent attempts to meet the eligibility criteria
  • temporary resident applicants attempting to apply as a permanent resident or citizen after 1 July 2020
  • withdrawing and recontributing super for a tax advantage.

The ATO is investigating some cases and may consider it appropriate to apply the general anti-avoidance rule for income tax (known as Part IVA) in relation to a COVID19 early release of super arrangement if you (or a representative) enter into a scheme mainly for the purpose of obtaining a tax benefit.

Applying when you are not eligible

You need to check the eligibility criteria carefully before you apply for COVID-19 early release of super and keep records that demonstrate your eligibility. If you apply and you’re not eligible at the time of submitting your application, the ATO will take action.

If you are unable to demonstrate your eligibility when they ask for evidence, they may revoke the determination issued for your application. This means the amount paid to you under COVID-19 early release of super will:

  • become assessable income
  • need to be included in your tax return and you will pay tax on the released amount.

If you provide false or misleading information you could face penalties of more than $12,000 for each false and misleading statement.

Example 1: JobKeeper and no change to working hours

Harry works 40 hours per fortnight and his employer receives the JobKeeper payment to subsidise his income. He hears that if you receive a government benefit you can apply for COVID-19 early release of super. Harry applies in late May 2020 and receives $10,000 from his super fund.

The ATO contacts Harry and asks him to demonstrate his eligibility. Harry explains that he receives a government payment. They advise Harry that JobKeeper isn’t a qualifying government payment but rather is a subsidy to his employer to contribute to his income. After discussing Harry’s circumstances, they determine that he does not meet any of the other eligibility criteria as he has not had a reduction in his working hours.

The ATO revokes the approval of Harry’s application. Harry needs to include the $10,000 he withdrew as assessable income in his income tax return and pay tax on the released super amount. In this case, the ATO does not apply an administrative penalty as Harry genuinely thought he was eligible as a result of receiving JobKeeper.

Example 2: No change in circumstances, subsequently ignores advice

Tom studies full time and works most weekends as a casual employee at a takeaway shop. During COVID-19 lockdown the takeaway shop is able to remain open and Tom continues to work each weekend as he normally would. After hearing about the COVID-19 early release of super measure, Tom decides he could use some extra cash and applies for and receives $8,000 in May 2020.

When the ATO review his application, they can see that the average amount he is paid from the takeaway shop hasn’t changed due to COVID-19. They ask Tom to demonstrate his eligibility and he explains that since he didn’t work full time he thought he was entitled to apply. They advise him that making a false or misleading statement can result in penalties and they help him understand the eligibility criteria. The ATO revokes the approval of Tom’s application. Tom needs to include the $8,000 he withdrew as assessable income in his income tax return. As Tom didn’t intend to make a false or misleading statement, they don’t apply a penalty this time.

In August 2020, Tom makes a second application for COVID-19 early release of super, this time for  $5,000, despite no change in his working hours or the average amount he is paid. Tom is aware that he is not eligible but knowingly makes a false and misleading statement when he makes the second application in August. The ATO again revokes the determination they issue with respect to his application. As a result, Tom needs to include the $5,000 in his 2020–21 income tax return and pay tax on this amount. Tom also must pay $12,600 in penalties for making a false or misleading statement.

Example 3: Deliberately arranging affairs to appear eligible, false or misleading statement

David works for a freight company and hears about the COVID-19 early release of super measure. He continues to work his ordinary 37 hours each week. He still wants to apply even though he knows he doesn’t meet any of the eligibility criteria. He changes the bank account that his wage is paid into a bank account in his wife’s name so that it looks like he is unemployed and no longer getting paid. In May 2020 he applies for $10,000 in early release of super and declares on the application that he is unemployed.

The ATO contact David and ask him to demonstrate his eligibility. David produces copies of his personal bank statement showing that his pay was not deposited into his account after April 2020. Through the Single Touch Payroll data David’s employer sends to the ATO each fortnight, the ATO can see that David has continued to be paid, regardless of the bank account the money is deposited into. It becomes evident that David’s deliberate intention is to deceive the ATO and exploit the COVID19 early release of super measure.

The ATO revokes the approval of David’s application. David needs to include the $10,000 he withdrew as assessable income in his income tax return. David also must pay $12,600 in penalties for making a false or misleading statement.

Withdrawing and recontributing your super

You should make sure you are fully informed and consider whether you need financial advice before you apply to access your super early.
Withdrawing your super early and then recontributing that amount back into your super fund and claiming a personal super contribution deduction, can result in a range of tax outcomes.

Depending on your individual circumstances, this practice could also result in tax and superannuation implications including:

  • Excess contributions tax – you may need to pay additional tax if you exceed your concessional or non-concessional contributions cap
  • Contributions tax – concessional contributions made to your super fund are taxed at the 15% rate by
    your fund impacting your eligibility for a super co-contribution
  • Division 293 tax – you may need to pay additional tax due to your income and personal super contributions.

To be eligible to withdraw an amount under the COVID-19 early release of super, the money released must be to assist you to deal with the adverse economic effects of COVID-19. If you withdraw an amount for the main purpose of recontributing the released amount as a personal super contribution to claim a tax deduction, you may no longer be eligible and be subject to tax consequences.

Part IVA – the general anti-avoidance rule for income tax

If you enter into a scheme mainly for the purpose of obtaining a tax benefit, there may be tax consequences, including the potential application of Part IVA.

Schemes under COVID-19 early release of super that attract the ATO’s attention include:

  • artificially arranging your affairs to meet the eligibility criteria
  • withdrawing and recontributing super to claim a tax deduction
  • contributing an amount of super to claim a deduction and then withdrawing that amount.

Where Part IVA applies to a scheme, the tax benefit obtained may be cancelled. In addition,  administrative penalties and interest charges can also apply. You should ensure that you comply with the eligibility rules to access your super early and your broader obligations under the taxation legislation.

The ATO understands that these are uncertain times and people’s circumstances change, so it is important that you keep records demonstrating your eligibility in case they need to see them.

Example: Withdrawing super to recontribute and gain a tax advantage

Jess, an airline pilot, is stood down by her employer when COVID-19 travel restrictions are put in place. Jess decides to apply for a COVID-19 early release of super, mainly for the purpose of recontributing the amount into her super fund in order to be entitled to personal super contribution tax deduction. Jess’s financial situation is such that she does not need any additional financial support throughout COVID-19.

In May 2020 Jess applies for $10,000 in COVID-19 early release of super. When she receives the money, she recontributes it into her super fund within a short period of time and notifies her fund that she intends to claim a personal super contribution tax deduction. In July 2020, Jess submits her tax return claiming a $10,000 personal super contribution deduction which reduces her taxable income.

The ATO determines that Part IVA applies as Jess entered into a scheme mainly for the purpose of obtaining a tax benefit. They issue Jess with a new notice of assessment reflecting the cancellation of the tax benefit and impose a penalty and interest charges.

Source

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This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

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