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  • SMSF - Anti-avoidance provisions

The laws relating to self-managed superannuation funds (SMSFs) include two anti-avoidance provisions, namely:

  • a prohibition on schemes to circumvent the prohibition on acquiring SMSF assets from related parties; and
  • a prohibition on schemes to reduce the apparent market value of SMSF assets and thereby avoid any compliance rule.

Anti-avoidance: related party acquisitions

Ordinarily, the prohibition on related party acquisitions prevents SMSFs from acquiring assets from related parties of the fund, with limited exceptions.

The reason for an anti-avoidance provision for this particular prohibition (while there is none, for instance, for the prohibition on borrowing) is clearly because the Government foresaw the likelihood that this particular prohibition is vulnerable to schemes.

Contravention is an offence

Note that contravention of this anti-avoidance provision is an offence punishable by imprisonment for 1 year. This contrasts with the SMSF market value anti-avoidance provision, whose contravention is merely subject to civil penalties. The contrast underscores the Government’s great concern about schemes circumventing the related party rule.

Example: Scheme circumventing the related party rule

Members of a certain group of entities have fallen into the habit of providing goods and services between members of the group through an unusual barter system known as a “trade exchange”. Under the trade exchange, member entities can provide goods and services to each other in exchange for “trade dollars”, a kind of cashless credit only of value within the group.

One member of the group is X Trust, a non-listed unit trust which has invested in real property located in Australia. It permits other members of the group to buy units in itself to receive returns on the investment in trade dollars.

Another member of the group is Y Co, a large employer. One of its employees has an SMSF which is interested in investing in X Trust units.

However, the SMSF and Y Co are related entities, since some of the SMSF members have majority voting interests in Y Co. This means that Y Co is prohibited from providing any assets to the SMSF. The SMSF and X Trust are not related.

The entities enter into the following arrangement:

  • Y Co purchases 1,000 units in X Trust for 400 trade dollars;
  • Y Co then makes a contribution of the Australian currency equivalent of 400 trade dollars into the SMSF and claims a deduction for this contribution;
  • the SMSF then uses the Australian dollars to buy 1,000 units in X Trust itself; and
  • mysteriously, Y Co then returns its own 1,000 units in X Trust back to X Trust, and X Trust pays for this in the Australian currency equivalent of 400 trade dollars.

Note that “trade dollars” of this sort are generally regarded as assets, not money, under superannuation law. Therefore, as Y Co and the SMSF are related parties:

  • the contribution of trade dollars from Y Co to the SMSF direct would have contravened the prohibition on related party acquisition; and
  • the sale of the X Trust units from Y Co to the SMSF direct would also have breached this prohibition.

The ultimate outcome of the scheme was that Y Co funded the SMSF’s acquisition of the X Trust units without breaching the prohibition on related party acquisitions. The scheme was plainly designed for this end.

Therefore this scheme falls foul of the anti-avoidance provisions and all the participants in the scheme may be prosecuted for an offence and at risk of imprisonment or criminal penalties.

Conclusion

If you have concerns over the anti-avoidance provisions applicable to SMSFs, call LAC Lawyers and we can provide advice and assistance.  

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SMSF - Anti-avoidance provisions Articles

Self Managed Superannuation Funds (SMSF) - Borrowing a New Amount to Repair an SMSF Instalment Warrant Asset

Date: December 02, 2011
Author(s): LAC Lawyers
An issue raised before the ATO very recently is whether a self-managed superannuation fund (SMSF) is permitted to borrow a new amount to repair an instalment warrant asset it already holds. As we have discussed in previous articles, an SMSF is generally prohibited from borrowing money. However, an exception is available for limited recourse borrowing arrangements (better known as instalment warrants) in which the SMSF borrows money to pay for an asset that is held in a property trust and only transferred to the SMSF when the amount is paid off.

Self Managed Superannuation Funds (SMSF) - Can an SMSF Carry on a Business? Part 1 of 2

Date: December 02, 2011
Author(s): LAC Lawyers
An old question relating to self-managed superannuation funds (SMSFs) is whether they are permitted to carry on a business. This is the first in our two part article on the ATO’s attitude to such activities, which is ambiguous and contains many pitfalls for the unwary.

Self Managed Superannuation Funds (SMSF) - Can an SMSF Carry on a Business? Part 2 of 2

Date: December 02, 2011
Author(s): LAC Lawyers
In Part 1 of this article, we looked at the ATO’s general disapproval of the carrying on of businesses by self-managed superannuation funds (SMSFs). This part of the article will look at the ATO’s apparent change in attitude to this issue. However we will analyse the real effect of the ATO’s new publication and warn about how little has really changed.

Self Managed Superannuation Funds (SMSF) - In-specie Payments by an SMSF

Date: December 02, 2011
Author(s): LAC Lawyers
It has always been accepted that a self-managed superannuation fund (SMSF) can make lump sum payments in specie. What is not so clear is what happens when a lump sum is paid as a commutation of part of a superannuation income stream. This issue, which has sometimes arisen in the past, has been brought recently before the ATO.

Self Managed Superannuation Funds (SMSF) - Insurance and SMSFs

Date: December 02, 2011
Author(s): LAC Lawyers
In our article entitled SMSFs and personal injury liability we discussed the idea of a self-managed superannuation fund (SMSF) obtaining public liability insurance to protect itself against personal injury claims. In this article, we will discuss forms of insurance that the SMSF can obtain over its members. This can include life insurance, disability insurance and trauma insurance. The effect of such insurance upon the SMSF has been the subject of recent debate.

Self Managed Superannuation Funds (SMSF) - Partial Lease by an SMSF of an In-house Asset

Date: December 02, 2011
Author(s): LAC Lawyers
It is well-known that an exception to the restriction on in-house assets held by a self-managed superannuation fund (SMSF) is the real property exception, under which the property is leased to a member or related entity for business purposes. One issue that has arisen recently is what happens when the in-house asset is only partially leased.

Self Managed Superannuation Funds (SMSF) - SMSFs and ESS interests

Date: December 02, 2011
Author(s): LAC Lawyers
An employee share scheme (ESS) is a scheme under which an employer provides shares or options (ESS interests) to employees at a discount. Unfortunately, the ATO has noted many instances of employees nominating their self-managed superannuation fund (SMSF) as the acquirer of ESS interests under an ESS. While employees may generally nominate another party as the acquirer of ESS interests, nominating the SMSF gives rise to serious issues, as we shall see.

Self Managed Superannuation Funds (SMSF) - SMSFs and Personal Injury Liability

Date: December 02, 2011
Author(s): LAC Lawyers
It may seem obvious, but self-managed superannuation funds (SMSFs) can be liable in their own right to personal injury litigation. Liability for personal injury caused by faults in property will normally fall under the tort of negligence. Under tort law, property owners have a common law duty of care to all individuals on their premises. If the required standard of care is not met, and injury occurs to the tortfeasor in a reasonably foreseeable manner, then the property owner is liable for negligence.

Self Managed Superannuation Funds (SMSF) - SMSFs and Rectifying In-house Asset Breaches

Date: December 02, 2011
Author(s): LAC Lawyers
A non-complying self-managed superannuation fund (SMSF) is open to all sorts of penalties. However, there is often some leeway for breaches, provided action is taken quickly. This article deals with the rectification of a breach of the in-house asset rule.

Self Managed Superannuation Funds (SMSF) - SMSFs and Tax Exemptions on Pension Assets

Date: December 02, 2011
Author(s): LAC Lawyers
Once a self-managed superannuation fund begins to pay income stream benefits (ie a pension) to any of its members, it can begin to claim a tax exemption on income earned on assets it holds that are being used to produce the pension. This article deals with the nature of this exemption and the misunderstandings that sometimes arise.

Self Managed Superannuation Funds (SMSF) - Stepchildren and SMSF Death Benefits

Date: December 02, 2011
Author(s): LAC Lawyers
The rules applicable to self-managed superannuation funds have restrictions on who can receive cashed out member benefits. One rule is that member benefits may be cashed in favour of a member’s dependants, if the member dies. One issue that has been raised recently is whether the ATO would accept a stepchild as the dependant of its step parent if its natural parent dies first or the pair divorce. This is apparently an issue that has already come up quite often in Australia.

Self Managed Superannuation Funds (SMSF) - Excess Contributions Tax – Release Authority

Date: November 28, 2011
Author(s): LAC Lawyers
If an individual makes contributions to his or her self-managed superannuation fund (SMSF) and these contributions exceed the caps relevant to that type of contribution, then the individual may be liable to excess contributions tax (ECT).

Self Managed Superannuation Funds (SMSF) - Income Streams – When They Start

Date: November 28, 2011
Author(s): LAC Lawyers
When a member of a self-managed superannuation fund (SMSF) satisfies a condition of release, he or she may be eligible for an income stream benefit from the SMSF. When a member is receiving an income stream of this sort, it can be highly relevant for tax purposes (both for the member and the SMSF) to determine exactly when the income stream commences and ceases. The ATO has just released draft guidelines on how to determine these times (Draft Taxation Ruling TR 2011/D3).

Self Managed Superannuation Funds (SMSF) - Losses on Disposal of Shares

Date: November 28, 2011
Author(s): LAC Lawyers
A self-managed superannuation fund (SMSF) is generally discouraged from engaging in business. Although the ATO and Parliament have failed to make any binding statements on this point, it is fairly clear that they expect this point to be followed. A related issue that has clearly been vexing the Government and the ATO in recent times has been that of the treatment of SMSF share sale losses.

Self Managed Superannuation Funds (SMSF) - Recording SMSF Contributions

Date: November 28, 2011
Author(s): LAC Lawyers
The Commissioner of Taxation has taken advantage of two recent cases before the Administrative Appeals Tribunal (AAT) to emphasise the importance of proper record-keeping by self-managed superannuation funds (SMSFs). He also emphasized the duty tax agents have to ensure that client SMSFs are not financially disadvantaged.

Self Managed Superannuation Funds (SMSF) - SMSF Auditors

Date: November 28, 2011
Author(s): LAC Lawyers
Every self-managed superannuation fund (SMSF) is required to arrange an annual audit of its accounts, statements and compliance. Audits must be carried out by an “approved auditor”. The SMSF trustee appoints an approved auditor every year and must provide the auditor with all documents needed for the audit. All audits must be in writing and highlight any important issues that may arise.

Self Managed Superannuation Funds (SMSF) - SMSFs and Non Arm's Length Income

Date: November 28, 2011
Author(s): LAC Lawyers
A self-managed superannuation fund (SMSF) is concessionally taxed at a very low rate. There is naturally a temptation in some quarters to exploit this fact by using an SMSF to help split income. However, the ATO has recently warned that the widespread abuse of an SMSF in this manner, whether the members believe it to be legal or not, is not in accordance with the law.

Self Managed Superannuation Funds (SMSF) - Winding Up an SMSF

Date: November 28, 2011
Author(s): LAC Lawyers
There comes a time in many instances when a self-managed superannuation fund (SMSF) must be wound up. Yet the Commissioner has recently warned that winding up procedures are frequently not being followed by SMSF trustees. In essence, the task of the SMSF trustee when winding up the SMSF is: to deal with all of the SMSF’s assets so that none remain; and to complete all administrative obligations.

Self Managed Superannuation Funds (SMSF) - Early Release Schemes

Date: November 25, 2011
Author(s): LAC Lawyers
For several years now, the Commissioner of Taxation has been making public his disapproval of schemes that illegally promise the early release of self-managed superannuation fund (SMSF) benefits. These types of scheme apparently have not disappeared, for the Commissioner has once more targeted them in his 2011-12 compliance program for SMSFs. Indeed, this year it would be wise for all SMSF trustees to familiarise themselves with the nature of this common and potentially disastrous form of illegal scheme.

SMSF - Anti-avoidance provisions FAQs

SMSF - Anti-avoidance provisions Lawyers

Frank Egan B.A., LL.B., A.C.L.A., F.T.I.A. (Notary)

Position: Chief Executive Officer
Frank Egan is the Managing Director of LAC Lawyers and has over 30 years experience as a lawyer. Frank heads up our taxation group and specialises in both onshore and offshore taxation arrangements including tax havens. He does not deal with any indirect taxation matters e.g. land tax, stamp duty or payroll tax. He is available to advise clients whether corporate or private on large, serious or complicated matters.

Michael Pickering B.A., LL.B. (Hons.), LL.M., M. A.

Position: Senior Solicitor
Michael Pickering is our most senior solicitor employed in the Melbourne Branch of LAC Lawyers Pty Ltd. He deals with a wide range of matters. He has over 30 years experience as a lawyer which he applies for the benefit of clients whether large or small.

Jonathan Lim BA (Hons II) LLB (Hons I)

Position: Solicitor
Jonathan practices exclusively in Australian and International tax and superannuation law. His specialty is the handling of negotiations with the ATO with respect to serious non-compliance by high net worth individuals and businesses, particularly over many years. He also advises on business structures, offshore tax issues and self-managed superannuation fund compliance.

SMSF - Anti-avoidance provisions Links

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