An investigation by the ATO found that more than $637 million has been drained from Australia’s superannuation system since 2020 via early, illegal withdrawals from SMSF funds.

In November 2023, the ATO launched a new program to address its primary concern with SMSFs. The Illegal Early Estimate assesses the ‘asset gap’ to scope the size and value of illegal access of SMSFs, trends and red flags amongst perpetrators.

Initial findings announced by the ATO this month calculate that more than half a billion dollars have been illegally withdrawn from SMSFs since 2020.

• In 2020: $381million illegally withdrawn from the superannuation system
• In 2021: $256million is lost to illegal withdrawals via SMSFs

66 percent of the illegal early access infringements identified by the Tax Office relate to new entrants to the SMSF system. It appears these perpetrators never intended to manage an SMSF. Rather, they sought early access to retirement funds or short-term finance. Consequently, the ATO is now watching newly established SMSFs that have received a rollover and don’t lodge the first annual return.

Indeed, almost 20 percent of all SMSFs established in 2022 remain 12 months overdue on lodging their first return. Of these newly established funds that haven’t made their first return 50 percent or 2,500 have completely drained the SMSF of funds.

Those clients who’ve had SMSF for years and suddenly fail to lodge returns should also set off alarm bells for advisers.

“It’s important for regulators and industry to ensure SMSFs aren’t used as a vehicle to access super illegally or to provide short-term finance.“

– Australian Tax Office

Illegal Early Access to Superannuation – The Red Flags

Another common trait of “bad actors” identified by the ATO is financial strain or hardship.

These conditions make it difficult to resist the temptation to illegally draw upon retirement savings and investments to which they have direct access. These include:

• Relationship breakdowns
• Cashflow issues
• Increased debt levels
• Issues meeting repayment schedules

When justifying SMSF benefits due to financial hardship, it’s the trustee who can ultimately decide on those terms, not the ATO. While it is legal under certain circumstances, it can be difficult to satisfy conditions for early access due to financial hardship.

Further, it’s extremely important that a trustee satisfies these conditions before withdrawing from the SMSF. Otherwise, it becomes a case of illegal early access attracting penalties and possible jail time.

The ATO has also identified a general lack of understanding and respect for the role of superannuation and in some cases, promoters of schemes.

Consequences of Illegal Early Access to Superannuation

If they suspect illegal early access to funds, the ATO will remove or withhold the fund’s ABN from SuperFund Lookup. This status of non-compliance stops rollovers, and contributions and may trigger late or non-lodgement fees.

Individuals may be audited and risk disqualification which is published on public record. Civil penalties of hundreds of thousands of dollars and a prison sentence of up to five years are also possible consequences of illegal early access to super.

Further, any amount taken in breach of the law is not something that can be simply returned to the fund, either. Rather, it adds up to loss of retirement funds, penalties and taxes. Any ‘reimbursement’ to the fund is considered a super contribution which is preserved until the trustee can legitimately access their super (that is if they’re not disqualified as a trustee, with a non-compliant fund or in jail.)

Save Time on SMSF Effort

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