The superannuation laws governing self-managed super funds (SMSFs) are receiving more and more (almost daily) attention. With the number of SMSFs exploding, adherence to the laws has become a key issue, not just for the funds themselves, but for the regulator of the sector too – the ATO.
Numerous rules govern the setting up and running of SMSFs, some of the more common being the need to meet the sole purpose test and the in-house asset rules, and the prohibition on acquiring assets from related parties.
This last rule can catch funds out if they are not careful.
The ATO was recently asked to give its views on an arrangement that was structured so that it avoided the prohibition on the acquisition assets from a related party of a self-managed fund.
Under the arrangement, an entity established an arrangement that facilitated the provision of goods and services through barter transactions between its members. Members become entitled to receive credits in the form of “trade dollars” for the goods or services they provide. The entity acts as a third party record keeper, using the trade dollars to monitor the value of cashless barter transactions.
A trustee of a unit trust is a member of a trade exchange. The trustee is empowered by the trust deed to accept a mixture of trade dollars and Australian currency as consideration for the issue of units in the trust. That is, another member of the trade exchange can purchase a unit for X dollars in Australian currency and Y trade dollars, the permitted ratio being set by the trustee of the unit trust according to particular criteria.
The unit trust invests in income-producing assets using both trade dollars and Australian currency. Distributions to unit holders can be made in a mixture of trade dollars and Australian currency.
The trustee of the unit trust has indicated that it is prepared to enter into an arrangement with a company that is a member of the trade exchange and the trustee of an SMSF that has as a member an employee of that company.
The trustee of the unit trust is not a related party of the SMSF, nor is the unit trust a related trust of the SMSF. The company is a related party of the SMSF.
The ATO says the parties to the arrangement agreed to take the following steps:
- Step 1: the company purchases a number of units in the unit trust (P units) using the prescribed ratio of Australian currency and trade dollars (say X dollars and Y trade dollars).
- Step 2: the company contributes an equivalent amount in Australian currency as an employer superannuation contribution to the SMSF (X + Y dollars) with a view to claiming a tax deduction for the contribution.
- Step 3: the SMSF uses the amount of the contribution (X + Y dollars) to purchase P units from the unit trust.
- Step 4: the unit trust redeems the units owned by the company for the same amount of Australian currency (X + Y dollars).
The net result of the arrangement was that: (i) the SMSF owns units in the unit trust; (ii) the unit trust has accepted X dollars Australian currency and Y trade dollars in consideration for the issuing of the units; and (iii) the company has converted X dollars and Y trade dollars into (X + Y) dollars Australian currency.
The Superannuation Industry (Supervision) Act 1993 (SIS Act) contains an anti-avoidance provision in s 66 to the effect that an investment manager of a regulated super fund must not intentionally acquire an asset from a related party of the fund.
The ATO says that when it looks to see if there is a contravention of the provision, it looks at the scheme as a whole and just not at isolated transactions within the scheme.
From the documentation concerning the arrangement in the above case, the ATO concluded that a scheme was entered into by the parties, commencing with the purchase by the company of units in the unit trust using a mixture of cash and trade dollars and concluding with the redemption of those same units for cash, with the intention of avoiding the application of s 66(1) of the SISA to the fund.
The ATO’s view is that the arrangement in this case contemplates two different entities acquiring units in the unit trust – the company and then the SMSF. The relationship between the trustee and unit holder is a connection between the two parties. Therefore, the trustee of the unit trust has a connection with each unit holder including the company.
The acquisition by the SMSF of the units from the trustee of the unit trust under the scheme is, therefore, an acquisition of an asset from the trustee of the unit trust, who has a connection with a related party of the fund as the company is a related party of the fund.
The ATO says the participants in the scheme may be liable to prosecution for an offence and if found guilty, the contravention is punishable on conviction by imprisonment for a term not exceeding one year.
And a final warning: A trustee of an SMSF who commits an offence under the SIS Act also puts at risk the complying status of the SMSF for tax purposes. In addition to the adverse tax consequences for the SMSF, a contribution to a non-complying superannuation fund is not tax deductible.