The ATO said the income diverted into these SMSFs appears to be non-arm’s length and utilises tax concessions.

“We are looking at complex arrangements between related entities in a private group that result in large capital gains or inflated income being distributed to SMSFs,” the ATO said.

“This is sometimes done through a chain of trusts. Legislation is in place to prevent this from occurring. Non-arm's-length income should be taxed at the top marginal rate rather than the 15 per cent concessional rate,” the ATO added.

Speaking to SMSF Adviser, the SMSF Association’s head of policy Jordan George said those trustees who have inadvertently made a mistake when it comes to a trust distribution should seek to make a voluntary disclosure to the ATO.

“The ATO is trying to be more engaged with the trustee market. They’re seeking people to come to them and fix their mistakes rather than be heavy handed,” he said.

He also said the ATO appears to be upping its focus on this area, with those who are intentionally circumventing the rules likely to be caught.

“With the increased focus on private groups and the improper use of trusts, it’d be very, very tricky to avoid the ATO’s eyes,” he said.

Read more:

Accountants 'sold a solution' with limited licence

Big four firm cautions super members on paperwork slip-ups

SuperConcepts announces partnership with Topdocs