We believe the integrity of the superannuation system is important and we thank the ATO for their valuable research.

On its own, the release could be seen or portraited as a disturbing picture. In our view there is much more to the IERE and it must be kept in perspective.

We encourage the ATO to continue its excellent work on seeking to stop those falling into the trap of illegal early release, especially by unscrupulous operators and fraudsters. More resources should be put into this already successful initiative.

We do not believe that wholesale reform of the rules about setting up and running a self-managed super fund (SMSF) are necessary until we have more analysis of the ATO data and its ongoing early release strategies.

All those who work in the SMSF sector need to think about potential solutions to this problem otherwise it will be left to the Government to develop policies which may limit the flexibility of all SMSFs.

At the same time, the Government needs to review some of the early release of superannuation benefits rules, in particular the Compassionate and Severe Financial Hardship rules.

The majority of tax agents without an Australian Financial Services License need guidance and assistance from the Australian Security and Investments Commission (ASIC) on how they can help their clients set up a SMSF and understand the risks of illegally withdrawing money from superannuation via a SMSF.

The category of SMSFs that loan money to the members of their fund, their relatives or a related business or trust are a separate category. Again, tax agents without an AFSL need further guidance from ASIC and further trustee education is crucial.

In all these areas it is essential that the ATO, ASIC, Tax Practitioners Board (TPB), professional associations and the sector at large work together to find a workable long-lasting solution.

Superannuation is for retirement, so any illegal early release means something is wrong

It’s true that superannuation funds must be run to satisfy the legislated sole purpose test (SPT) at all times. A failure to comply with this test may mean that a superannuation fund loses access to superannuation tax concessions, or the trustee and their advisers can be penalised.

Unfortunately, the SPT is often misunderstood. It says that superannuation funds can be run for a number of purposes including “the provision of benefits for each member on or after the member’s retirement”.  It also allows for a number of other purposes which are not important here.

In some cases, early access to superannuation before retirement is permitted

Superannuation funds must also satisfy the legislative operating standards which specify in broad terms all the rules that superannuation funds are expected to meet. One operating standard is relevant here – “the payment by [superannuation] funds of benefits arising directly or indirectly from amounts contributed to the funds.”

There are more than 13 different rules that allow superannuation benefits to be paid before someone retires including:

• death
• permanent incapacity
• compassionate grounds
• severe financial hardship.

We have more to say about the compassionate grounds and severe financial hardship rules in Part 2 of this article.

IER Spruikers

Often, people gain access to their superannuation after speaking to a person or organisation that helps them achieve this. Typically these “advisers” do not have a financial services license. They fail to explain the dangers of illegally accessing retirement money (including the potential for the ATO to ban the person from being a SMSF trustee, which causes problems for the individual in other areas of their life and significant potential tax penalties).

ASIC works very hard to shut down these spruikers and is often very successful.

Registered Tax Agents without an Australian Financial Services License

We know from ATO data that many SMSFs are set up with the assistance of a Registered Tax Agent (RTA). Many of those RTAs do not have an Australian Financial Services License and will often conclude that they cannot assist vulnerable clients because they do not want to fall foul of the Corporations Act and face penalties. It’s no surprise to say that people often do not automatically fess up to intending to break the rules. This means more questions need to be asked to find out what is really going on but the unlicensed RTA will find it difficult to ask them, without being deemed to provide financial advice.

Our preferred solution is that the law should be amended to allow unlicensed accountants to provide simple advice to their clients about the risks and dangers of setting up a SMSF, and allowing them to suggest that it may not be in the client's best interests (as is required under the accounting code of ethics – APES 110).

Until the law is amended, we encourage ASIC to release guidance to unlicensed RTAs on what can be said without accidentally breaching the Corporations Act.