Two recent Federal Court cases should ring alarm bells for everyone with a superannuation account.
The two cases involve Kevin and Helena Denlay against the Tax Office. The matter involves the ability of the ATO to satisfy a tax debt that was owed by the Denlays using their super fund money.
The back story
Five to six years ago, the ATO began auditing the Denlay’s financial affairs, because of information it had received from a former employee of a bank based in Lichtenstein.
As a result of the audit, in December 2008, the ATO issued the Denlays with invoices for outstanding taxes and penalties of almost $1.7 million for several financial years. By September 2011, this amount had been increased to over $7.4 million.
The Denlays didn’t have sufficient money to satisfy these debts. They had successfully argued before the Queensland Supreme Court – both at an initial stage and on appeal – that the ATO’s assessments would not have to be paid for a period of time.
In these Supreme Court cases, the Denlays argued that if they were made bankrupt, they wouldn’t be able to conduct any further judicial appeals against ATO decisions on their tax affairs.
In December 2009, the ATO knew that the Denlays had an SMSF, but they had moved the money from this super fund to a large retail super fund run by BT Funds Management Ltd.
At one point the SMSF had a balance of just over $262,000. By August 2011, only $62,000 of this remained with BT.
The ATO made a decision to demand money be taken out of the BT super fund as part satisfaction for the Denlay’s tax debts. BT paid this money in December 2011. At about this time, the Denlays became bankrupt.
Hands off their super
The Denlays took Federal Court action and argued that the ATO was being unreasonable in demanding payment of their super fund money for their personal debts. The Federal Court agreed and said the super fund money had to be returned.
The importance of this case involves the use of super fund money to satisfy personal tax debt. In most cases, the ATO’s stated policy is that super fund money can be used for personal tax debts but any payment order will only have effect if the money can be paid out of the super fund – for example because of permanent retirement.
In many cases, a bankrupt’s super money is protected unless it can be shown that super contributions have been made to frustrate a creditor’s legitimate financial demands.
What to do about it
One potential course of action is to become bankrupt if the ATO issues a payment demand to a super fund for payment of personal tax debt. This would have the effect of cancelling out the payment order issued by the ATO to a super fund.
It needs to be remembered, however, that ATO payment demands can only be challenged before a judge, which means if bankruptcy isn’t an option, then expensive legal costs will have to be incurred to fight the Tax Office.
As the Denlays had been made bankrupt, the Court had to decide who would receive the super money forcibly removed from the BT super fund. Should it be the super fund or the Denlay’s bankruptcy trustee?
Ultimately, Justice Logan decided that the money should be paid back into the BT superannuation fund. The bankruptcy trustee had argued before the Court, that the super money wasn’t personal property under the bankruptcy laws and hence they had no right to it.
While the facts surrounding this case are slightly unusual (for example, money held in overseas bank accounts), it does show a willingness of the ATO to seek money from super funds for personal tax debts.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Time to go shopping – JB Hi-Fi and Woolworths [1]
- Fundie’s Favourite: Reasons to love toll operator Transurban [2]
- Ron Bewley: Financials outside the Big Four – Magellan and FlexiGroup [3]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [4]
- Paul Rickard: The best broker for my SMSF [5]