Thanks to the ATO’s COVID-19 early release of super, those who have been financially affected maybe able to access some of their super early. However, since there is no restriction on how this money can be spent, eligible individuals can use this money for anything they choose or save it for future expenses. They can also recontribute some amounts back into their superannuation if they meet the contributions rules (both eligibility and acceptance) and, in the case of SMSFs, their trust deed allows it.
This recontribution strategy involves withdrawing a lump sum and recontributing these funds into super as a non-concessional or concessional contribution, in which the individual can claim a tax deduction for the contributed amount. Although recontribution strategies are acceptable, it is important to understand that the new early release scheme is aimed to help those who are affected by COVID-19, not to help individuals obtain tax benefits. The ATO is now concerned that these actions have become prevalent and has issued a warning: “COVID-19 Early release of super – integrity and compliance”.
The ATO highlighted the following aspects of the tax law related to superannuation that can happen if individuals use the mentioned recontribution strategy:
- Excess contributions tax; individuals 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; individuals may need to pay additional tax due to income and personal super contributions.
Furthermore, if individuals enter the COVID-19 early super scheme mainly for the purpose of obtaining a tax benefit, the application of Part IVA can happen. The ATO 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. Administrative penalties and interest charges can also apply.
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