Will Tax Office fines add to the early super access pain?

Australian Tax Office superannuation withdrawal payment COVID-19 ATO
The Australian Taxation Office plans to take action against people who deliberately exploited the government's COVID-19 financial hardship early release super scheme.

Just how tough is the Australian Tax Office (ATO) going to get with people who withdrew superannuation during the COVID-19 pandemic?

It is an interesting question given the unique circumstances that surrounded the withdrawals of up to $20,000 per worker over two financial years and revelations that lots of money was paid out to people who were not entitled to access it.

Possession might be nine tenths of the law but the ATO represents that other tenth and it is already indicating that it will be handing out $12,600 fines to those who grabbed their super money incorrectly.

People surprised that payments are being scrutinised afterwards

This has come as a big surprise to the 2.1 million people have taken out at least $15 billion from super, with the second withdrawal in this new financial year also set to be popular, judging by the fact that the ATO website crashed due to the strong demand.

Many who applied to withdraw their super thought that their claim would be assessed before the money was paid out but in fact there were very few checks made other than basic identification and fraud precautions.

Speed was a priority given the nature of the pandemic.

With the money paid out and, in most cases, spent – sometimes unwisely – the penalty could be felt in ways other than the lower retirement savings and missed investment earnings.

While the super withdrawals don’t have to be included in tax returns, that doesn’t stop the ATO doing some simple data checking to identify taxpayers who have broken the rules and could face hefty fines.

Workers had to meet conditions for early super withdrawal

There were several conditions workers were meant to fulfil to be able to withdraw their super early and the most basic was that they needed the money to cope with the adverse economic effects of the pandemic.

In general, that means losing your job or suffering pay cuts of at least 20% or also being eligible for assistance payments including the JobSeeker payment.

In many cases applicants may have believed they would suffer substantial cuts to their income but they may not have eventuated or were less than expected.

Some applicants certainly put in claims thinking they would be assessed and either accepted or rejected but instead the claims were virtually all quickly processed.

Now the ATO is in a position to compare these income estimates with reality and if the income dip is less than 20%, apply fines.

Will the ATO show some leniency?

Whether they will do so or show some leniency due to the worrying nature of the pandemic remains to be seen but so far, the warnings have been quite clear.

“It is important that you assess your eligibility accurately and honestly,’’ the ATO said.

“We’re here to help people in our community who are doing the right thing and we’ll assist you if you make a genuine mistake.

“Our role is also to ensure the integrity of the program and that payments get to those who need them.

“We’re managing the eligibility criteria with strict guidelines, and will take action when we uncover fraud or people seeking to exploit the program.

There could certainly be some confusion given that the ATO told successful applicants: “After careful consideration, we’ve determined that you are eligible”.

That “careful consideration’’ doesn’t stop the ATO from re-examining and fining those afterwards that fail the lost income test.

ATO will be tough on those trying to reduce tax

While we won’t know how aggressive the ATO will get on super withdrawals for a while, they have promised to be particularly tough on those who avoid tax through a super withdrawal and re-contribution strategy.

By claiming $10,000 in early super release, those who were worried that they had claimed money to which they were not entitled might consider just paying the money back into their super.

That could be a very big mistake.

This re-contribution strategy is a really bad idea because while the ATO has said it will be understanding about legitimate mistakes, there has been no such lenient language towards those trying to reduce tax bills by withdrawing and re-contributing to super accounts.

While the early super payments were tax free, extra super contributions are taxed concessionally – usually at 15% which is often lower than most worker’s marginal tax rate.

It is less clear what might happen, say, to a taxpayer who tries to make up their super withdrawal through making a salary sacrifice arrangement, but it would be wise to be very cautious about withdrawing and then re-contributing to super accounts in any form.

While on the surface such re-contribution strategies might appear legal, that ATO has wide powers under the “general anti-avoidance rule for income tax”.

Given that it is nearly tax time, waiting to check with your accountant or tax agent before re-contributing is a very good idea.

Genuine mistakes can be forgiven

Perhaps contrary to popular belief, the ATO often shows some mercy to taxpayers who have made genuine mistakes and in the case of the hastily assembled super early release scheme there could be some latitude shown.

What is important here is to ensure that any mistakes can easily be construed as genuine and honest mistakes rather than simply a chance to grab some early access to super because it is available.

Industry Super Australia chief executive Bernie Dean said it was important that ineligible applicants were weeded out because they could be holding up payments for those in desperate need.

“The ATO has a clear warning to those wanting to make a dodgy application – don’t – you will be caught, made to pay more tax and fined.”

“We will work with the Prime Minister and the Treasurer on how we can regrow balances after this scheme, because we all pay, through higher taxes, for more people retiring with only the aged pension,” said Mr Dean.