From time to time, and for a myriad of reasons, you might have personal cashflow problems. If you run your own super fund, then using some of its money to solve these problems can be very tempting.
Hubris sometimes arises when you and other members know that your super monies can’t be used for personal purposes such as fixing your personal or business cashflow dramas, and none of you think anyone will misuse the super fund’s money which leads you to require only one trustee signatory on your fund’s bank account.
If you take money out of your super fund other than in accordance with the super laws, then severe penalties can apply. These can range from having the withdrawals taxed at the highest marginal rate (that is, 45% Medicare Levy which from 1 July 2014 will include the National Disability Insurance Scheme Levy and the Temporary Budget Repair Levy), to having your fund declared to be non-complying to also facing additional penalties under its general tax administration powers.
Below I discuss a recent Administrative Appeals Tribunal (AAT) where an individual pleaded for all these penalties to be lessened because he argued they were excessive and created unnecessary hardship for him.
To solve the first problem the only sensible approach is to know that you can’t access your super money early because there is a high probability of getting caught. Don’t forget that SMSFs need to be externally audited each year, and if an auditor finds any illegal early withdrawals from your super fund, then it must be reported to the Tax Office.
To solve the second problem the best approach is to make all trustees if individual trustees, or all directors if you use a corporate trustee, signatories to the fund’s bank account. This doesn’t prevent all trustees agreeing to access money early and it doesn’t prevent the forging of signatures. However it shows that you have done all you can to stop one trustee doing something wrong.
Huckle versus Commissioner of Taxation
Mr Huckle is a well-paid mining specialist based in Perth. He had a gambling problem and in the 2011 and 2012 financial years withdrew about $193,000 from his super fund.
Once the ATO were aware of these super law breaches, it imposed tax penalties of over $93,000 plus $4,300 in additional administrative penalties.
These administrative penalties had been reduced by 80% because Mr Huckle had approached the Tax Office about his illegal withdrawal of his super benefits.
For the 2013 financial year, Mr Huckle received a refund of over $24,000 and this was used to reduce his Tax Office debt.
Huckle pleaded for leniency from the Tax Office for the remaining $70,000 owing, however it knocked him back twice, so he took matters to the AAT.
The AAT noted that Huckle had more than $660,000 in debts. Ten per cent of this amount was for a Holden car he had purchased in 2012 for $70,000 but at the time of the AAT hearing, had an approximate market value of $50,000.
He owed almost $70,000 in credit card debts and had an investment property loan of $445,000. The remaining debts (almost $80,000) were personal loans.
He was paid fortnightly and 50% of his income was spent on interest and capital payments for these debts. Based on his expense budget presented to the Tribunal he had about $500 per fortnight more than his overall expenses.
Under the Tax Offices general powers of tax administration, leniency can only be applied when it can be shown that you’ll suffer severe financial hardship and the circumstances don’t justify the penalties that have been imposed.
The Tribunal denied Huckle’s application. It said that by demanding he pay the ATO the amount owing, he would still be able to afford “the basic necessities of life” even if these repayments might temporarily reduce his standard of living.
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.
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Also in the Switzer Super Report:
- Tony Featherstone: Five yield payers under $5
- Charlie Aitken: Wait for the buying opportunities part 2
- Rudi Filapek-Vandyck: My SMSF – a tilt to dividend-paying industrials
- Roger Montgomery: Flight Centre – things to excite investors
- Staff Reporter: Buy, Sell, Hold – what the brokers say
- Questions of the week: It’s going to be all right
