In a shocking revelation from the Australian Taxation Office (ATO), over 16% of newly established Self-Managed Super Funds (SMSFs) failed to lodge their initial annual returns in 2022.
Even more concerning, a significant portion of these funds had depleted their balances through unauthorised member payments.
This finding has triggered an intensive ATO crackdown on illegal superannuation access schemes.
So we decided to share a blog that highlights the critical points Australians need to understand about how the ATO protects super funds, what constitutes illegal access, and the consequences of non-compliance.
The Growing Threat To Retirement Savings
SMSF Trusts are being set up by ATO to mitigate fraudulent activities provided there is no proper management of the individual’s retirement ostensible expenses.
Such funds act as a front to facilitate illegal premature withdrawals. Most of the schemes are designed by the promoter who approaches desperate individuals and charges exorbitant fees to assist them in accessing their superannuation funds unlawfully.
1. How The ATO Is Protecting Your Super?
ATO’s goal is to protect the superannuation contributions of Australians from any illegal early release schemes.
This is what the ATO does to protect super funds.
- Raising Awareness: ATO informs the general public about the dangers of superannuation fraud/theft and how to combat it.
- SMSF Review and Assessment: Every new SMSF undergoes a thorough review before it receives a ‘Registered’ or ‘Complying’ status on Super Fund Lookup (SFLU).
- Collaborating with Industry Partners: By working with industry partners, the ATO strengthens the super rollover process, reducing the risk of SMSFs being set up for illegal withdrawals.
These measures help to protect retirement savings, reduce fraud, and uphold the integrity of SMSFs in Australia.
2. The SMSF Registration Process
The registration process for SMSFs is thorough and designed to prevent misuse.
Here’s a summary of the registration steps and what each status means:
| Status | Description |
|---|---|
| Registered | Given to newly registered SMSFs and visible on SFLU within 7 days of registration. |
| Complying | Status updated within a week after SMSF receives its Notice of Compliance, signifying ATO’s full approval. |
| Non-Complying | Indicates ATO concerns with the SMSF’s operation, possibly leading to restrictions on super rollovers. |
If issues arise with a new SMSF during registration, the ATO promptly contacts the authorised individual to resolve them.
Clear communication on SFLU helps SMSF operators and members understand the fund’s current compliance status.
3. SMSF Member Verification System: Enhanced Security
To reduce fraud risk, the SMSF Member Verification System is mandatory when rolling over super funds to an SMSF.
When an APRA-regulated fund processes a rollover request, it verifies:
- Fund’s ABN and Compliance Status – Confirms the SMSF’s active and regulated status.
- Member’s TFN and Bank Account – Checks that the requesting member’s tax file number (TFN) is associated with the SMSF.
- Electronic Service Address (ESA) – Confirms the ESA matches the records held by the ATO.
If an SMSF fails these verifications, the rollover will not proceed, and any suspected illegal access is reported to the ATO and may be flagged for further investigation.
4. What Constitutes Illegal Access To Super?
Accessing superannuation funds before meeting a legal condition of release is considered illegal early access.
Examples of misuse include withdrawing super funds for personal expenses like holidays, property purchases, or debt payments without meeting a release condition.
Legal conditions to access super generally include:
| Condition of Release | Description |
|---|---|
| Reaching Age 65 | Super can be accessed when a member turns 65. |
| Retirement | Defined based on age, cessation of employment, and intentions regarding future employment. |
| Compassionate Grounds | Includes severe financial hardship, terminal illness, or permanent disability. |
| Temporary or Permanent Incapacity | Access granted if a member becomes incapacitated and can no longer work. |
5. Risks From Promoters Of Illegal Early Access Schemes
Promoters working aggressively trying to promote certain practices usually focus on the financially stressed individuals or those who are oblivious to superannuation laws.
These schemers can also persuade members into setting up one’s own SMSF, rolling over their funds and then accessing the super for personal needs.
Some of these promoters demand exorbitant prices and ask for personal information, thus raising the chances of identity theft.
To prevent falling into these schemes:
- Only deal with licensed SMSF accountants or financial advisers.
- Never share identity documents with unverified individuals or agencies.
6. Consequences Of Illegal Access To Super
There are both financial and legal ramifications for the member and the trustee involved in such misconduct when funds are accessed in an illegal manner:
For Individuals:
- Taxation and Fines Imposed: The amount taken out attracts taxation which is equivalent to one’s marginal tax. Otherwise, there may be penalties for tax gaps.
- Lost Tax Credits: Expenses incurred for the purpose of promoting illegal extradition strategies are ineligible for claiming tax deduction.
- Disqualification as Trustee: A member who has been disqualified has a period of six months to move his or her superannuation benefits to an appropriate superannuation fund.
- Risk of Identity Theft: Providing personal data to the promoters of scamming schemes possesses risks of identity theft.
For Trustees of SMSFs:
- Administrative Penalties: Trustees face penalties up to $16,500 per transaction (increasing to $18,780 from 1 July 2024).
- Compulsory Resignation: In case of involvement in illegal early access, the involved trustee will be disqualified thus requiring arrangements for appointing a new trustee.
- Public Disqualification Listing: The names of trustees that have been disqualified are made available to the public through the Commonwealth Government Notices Gazette which means such information is permanently available.
7. Red Flags And Common Signs Of Illegal Super Access
The ATO specifically monitors these high-risk activities:
- Newly Established Funds:
- Immediate rollover requests
- Large withdrawal attempts
- Multiple membership changes
- Existing Funds:
- Sudden pattern changes
- Unexpected benefit payments
- Irregular transaction timing
- Member Behaviour:
- Multiple fund establishments
- Frequent trustee changes
- Unusual rollover sequences
Key Takeaways To Safeguard Your Super
To protect your SMSF and retirement savings, keep the following points in mind:
Essential Documentation:
- Prepare thorough minutes of meetings concerning decisions made on all investments
- Keep detailed records of the members
- Record the reasons for all payments of benefits
- Retain evidence showing the member has satisfied the condition of release
- Keep all members’ identity verification documents on file
Regular Compliance Checks:
- Conduct a transaction survey of the fund every three months
- Evaluate the investment strategy at the end of every year
- Committee meeting records on a consistent basis
- Bank account balancing on a regular basis and interval
- Validation of member details at regular intervals
Protection Against Scammers
Avoid becoming a victim of illegal access schemes by:
- Verifying advisor credentials through official channels
- Never sharing fund passwords or access codes
- Maintaining separate personal and fund banking
- Documenting all fund-related communications
- Regularly monitoring fund balances and transactions
Secure Your SMSF With Expert Guidance From KPG Taxation
To make informed, secure choices for your SMSF, professional support is essential—especially with recent ATO crackdowns on illegal superannuation access. At KPG Taxation, our team is here to guide you through managing your SMSF within the legal framework, helping you protect and grow your retirement savings.
Contact us today to discuss how we can support your SMSF journey and keep you on track with the latest regulations and strategies.
