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Taxpayers cautioned on abusing ‘tax arbitrage’ of early super release

Taxpayers have been urged to reconsider applying for the early release of super to simply obtain tax benefits, with the loophole going against the intent of the government’s COVID-19 relief measures.

Tax&Compliance Jotham Lian & Aidan Curtis 06 April 2020
— 1 minute read

Temporary early access to super was one of several changes made to superannuation as a part of the government’s second stimulus package to offset the economic effects of the coronavirus outbreak.

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Eligible individuals can apply for an early release of up to $10,000 in the 2019–20 financial year through the myGov website from 20 April.

A second payment of up to $10,000 will be available from 1 July 2020, and members will have until 24 September to apply.

SuperConcepts general manager of technical services and education Peter Burgess has now cautioned against a loophole that is currently making its way around the community.

“We are hearing about people who either voluntarily or involuntarily agree to reduce their hours by 20 per cent or more for what could be a short period of time, and then make salary sacrifice contributions to their superannuation fund,” Mr Burgess said.

“They then apply to have $10,000 released from their superannuation fund in this financial year and a further $10,000 released in the next financial year before 24 September, under the government’s new COVID-19 compassionate ground condition of release.

“Depending on the individual’s income and their available concessional contribution cap space, this can result in a material tax saving for the individual.”

According to Mr Burgess, the tax arbitrage comes from the 15 per cent tax on salary sacrificed super contributions versus normal marginal rates of tax under ordinary income, and the eventual tax-free payments of the early super release.

Mr Burgess believes the ATO will likely scrutinise such situations where an individual is salary sacrificing yet accessing the early super release measure.

“We need to remember the purpose of this new compassionate ground condition of release is to provide financial relief for those impacted by COVID-19; it shouldn’t be seen as an opportunity to embark on tax arbitrage strategies,” Mr Burgess said.

“It’s also worth noting the application for release is likely to involve the completion of an online ‘approved form’, which means penalties apply to false and misleading statements.

“It will be difficult to justify a claim for the early release of some of your superannuation on COVID-19 compassionate grounds if you are making salary sacrifice contributions to your fund.”

Taxpayers cautioned on abusing ‘tax arbitrage’ of early super release
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