There are no restrictions on how the money released under the new coronavirus compassionate ground early release scheme is spent. This means that an eligible individual is free to spend this money on anything they choose, or save it for future expenses.
They are also free to recontribute any unused amounts back into their superannuation in the future, provided they meet the contributions rules (both eligibility and acceptance) and, in the case of SMSFs, their trust deed allows it.
This strategy, known as a recontribution strategy, involves withdrawing a lump sum and recontributing these funds into super as a non-concessional or concessional contribution (where the member can claim a tax deduction for the contributed amount).
While recontribution strategies are acceptable and technically correct, it is important that your clients keep in mind that the new early relief measure was intended to help people financially affected by COVID-19 — not as an opportunity to obtain tax benefits through the use of recontribution schemes.
The ATO has now become concerned that the latter has become more prevalent than imagined. A reported sharp increase in the number of newly established SMSFs during the COVID-19 period has also raised red flags for the ATO. Its concern is that these actions may be purely to access early release amounts, and therefore tax breaks, through the temporary scheme.
The ATO says recent enhancements to its access to certain data will greatly aid it in tracking down taxpayer behaviour. Single touch payroll for example gives it real time information on whether people are employed and how much they are being paid.
As far as withdrawing money from super under the new scheme and re-contributing the amount back, the ATO has highlighted other aspects of the tax law in relation to superannuation of which clients need to be cognizent. These include:
- Excess contributions tax; clients may need to pay additional tax if they exceed the concessional or non-concessional contributions cap
- Contributions tax; concessional contributions made to a super fund are taxed at the 15% rate by the fund
- affecting eligibility for a super co-contribution
- Division 293 tax; clients may need to pay additional tax due to income and personal super contributions.
There is also the application of Part IVA in the ATO’s integrity toolbag. It says schemes under COVID-19 early release of super that attract its attention include:
- artificially arranging 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.