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How Scammers Are Targeting Pre-retirees and Their SMSFs

By: Nicola Field

over-50-featureSelf-managed super fund trustees and their advisors need to be alert to the latest round of wealth-stripping fraudulent schemes.

Fraudsters have Australia’s over-50s in their sights, and pre-retirees with self-managed super funds (SMSFs) are particularly vulnerable.

Figures from the Australian Competition and Consumer Commission (ACCC) show that in 2015, reported losses to fraudulent investment schemes totaled more than A$229 million. It’s easy to assume younger, less financially savvy investors would be the preferred targets of scammers, but that’s not always the case.

“Investment scams come in many guises including business ventures, superannuation schemes, managed funds and the sale or purchase of shares or property,” says ACCC deputy chair Delia Rickard. Cashed-up pre-retirees hoping to boost their retirement savings can be an easy target, and last year, 40 per cent of reported scam victims were aged over 55.

The Australian Taxation Office (ATO) has recently entered the fray, warning trustees of SMSFs about the risks of breaching the law in an effort to give their super savings a final fillip before retirement.

Scammers target SMSFs

SMSFs are fertile ground for scammers, and it’s not hard to see why. Australia’s growing army of “selfies” – trustees of SMSFs – currently number more than one million. Most are mum and dad investors who, collectively, are sitting on super savings worth around A$595 billion.

A cumulative investment of this scale makes SMSFs highly attractive to unscrupulous operators. Add to this ATO figures showing one in five SMSFs has less than A$200,000 in assets – the benchmark below which some experts claim SMSFs become less economically viable than other options – and it’s easy to see why fund trustees can be drawn into illegal schemes that promise turbocharged gains coupled with appealing tax savings.

What’s different this time around?

Bogus tax-based investment schemes are nothing new. ATO deputy commissioner Michael Cranston says, “Tax avoidance schemes have long been a target for the ATO and we have been hugely successful in identifying and shutting these down.”

What’s shifted is the focus on pre-retirees as easy prey. “We’ve recently seen an increase in the number of schemes that are designed specifically to target those approaching retirement,” Cranston confirms.

For SMSF trustees without reasonable knowledge of Australia’s complex tax laws, it can be difficult to differentiate between a complicated scheme and an illegal scam. This is a dividing line worth knowing because, as Cranston notes, “After working hard to build a nest egg to fund retirement, the last thing you want is to inadvertently risk it all by getting involved in a risky scheme.”

The ATO has identified dividend stripping and diversion of personal services income as key danger areas for SMSFs.

Dividend stripping

Dividend stripping occurs when a private company with accumulated profits channels franked dividends into a SMSF instead of distributing them to the original shareholders. In practice this can be achieved by a SMSF buying a private business so that franked dividends are paid to the fund.

These arrangements are problematic for the ATO because rather than “top-up” tax being paid at the individual shareholder’s marginal rate, dividend income is shielded by the SMSF’s low or zero rate of tax and often coupled with a refund of franking credits.

The potential issues of dividend stripping span a range of sections of the Tax Act including Part IVA, which covers general anti-avoidance issues, and Division 7A, which address private company benefits being treated as dividends.

Professional development: 2016 National SMSF Conference on Demand

In late 2015 the ATO issued Taxpayer Alert 2015/1, addressing dividend stripping arrangements by SMSFs, and offered reduced or zero penalties to funds that voluntarily self-amended their annual returns.

To date this has resulted in the unwinding of approximately 17 arrangements and the repayment of around A$3 million of incorrectly claimed franking credit refunds. A further 50 cases are at various stages of investigation, involving an estimated A$24 million in claimed franking credit offsets.

Diversion of personal services income

Another area in the ATO’s spotlight is diversion of personal services income (PSI). This involves arrangements where income for services undertaken by an individual are paid to their SMSF, either directly or through one or more entities.

Under these schemes, the income earned by an SMSF member may be taxed at the lower or zero rate of tax applicable to the SMSF, instead of at the marginal tax rate of the individual who actually earned the income. Again, the ATO issued Taxpayer Alert 2016/6 addressing this issue in mid-2016.

High stakes for advisers

For SMSF trustees, the rules surrounding their homegrown super fund may be viewed as complex. As a result, Michael Cranston says, “Many SMSF members rely heavily on the advice of financial planners, accountants and other advisers.” While the use of professional advisers makes sense, it also leaves SMSF trustees vulnerable to unethical advisers.

“Unfortunately, promoters of these risky schemes are aware of the role that advisers play and are targeting advisers to get their assistance in recommending schemes to clients,” Cranston explains.

Promoters of dodgy retirement planning schemes can be prosecuted. Where intermediaries are found to have encouraged clients to adopt these arrangements, the ATO also may apply hefty promoter penalties and, when appropriate, refer the matter to the Tax Practitioners Board.

For members of SMSFs, it’s not always easy to recognise their fund is vulnerable to unwanted ATO attention – particularly if they have followed the directives of trusted advisers. However Cranston simplifies the “sniff test”, saying, “While the schemes we are targeting may be complex, our message is not – if it looks too good to be true, it probably is.”

Project Super Scheme Smart

While the ATO admits it has not found widespread use of unlawful arrangements by SMSFs, it is keen to ensure they don’t become a problem in future. To help SMSF trustees and their advisers understand what to look out for, the ATO recently launched Project Super Scheme Smart to highlight the potential pitfalls of dodgy retirement planning schemes.

In particular, the ATO says SMSF trustees should be wary of schemes that:

  • are artificially contrived and complex
  • involve a lot of paper shuffling
  • are designed to leave the taxpayer with minimal or zero tax, or even a tax refund, and
  • aim to give a present day tax benefit if the arrangement is adopted.

Cranston sums up his advice to SMSF trustees, saying, “Make sure you are receiving ethical professional advice when undertaking retirement planning, and if in doubt, seek a second opinion from an independent, trusted and reputable expert.”

Source: INTHEBLACK

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