Investing & Structuring Issues
The 2012 SISFA Forum
Scott Hay-Bartlem, Partner
STEP, CTA, SMSF Specialist Advisor™
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Overview
•  Structuring the fund – corporate trustees
•  In-house asset rules and structuring
•  Property developments and SMSFs
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THE DANGERS OF BEING A
TRUSTEE
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The Dangers of being a Trustee
•  Individual vs Corporate Trustee
•  Many clients choose individual due to
company establishment cost
•  Can be far more expensive to have an
individual trustee in the long run
•  Two recent cases where costs to the
individual trustees that could have been
avoided with a corporate trustee
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Triway Superannuation Fund
•  Triway Superannuation Fund and
Commissioner of Taxation, 10 May 2011
•  SMSF three members and trustees –
husband, wife and son
•  Son had a drug addiction – withdrew almost
all of the money from the Fund
•  Trustees concealed the loss for five years
on the advice of their tax agent
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Triway Superannuation Fund Cont’d
•  After an audit ATO issued a notice of noncompliance
•  AAT – although “only natural to have
sympathy for the trustees” – found
Commissioner’s decision had to be
affirmed
•  Fund remained non complying and
amended assessments for 2003,
2004,2005, 2006 and 2007 years remained
payable – by the trustees
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Shail Superannuation Fund
•  Shail Superannuation Fund and
Commissioner of Taxation, 23 December
2011
•  Former husband and wife trustees and
members
•  Husband removed $3,460,000 from Fund
without wife’s knowledge
•  Divorced and he disappeared overseas
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Shail Superannuation Fund Cont’d
•  Neither member had satisfied a condition of
release
•  ATO issued notice of non-compliance with
total tax and penalties of $3,059,206
•  AAT expressed sympathy for the wife but
affirmed ATO decision – wife as remaining
trustee responsible for the Fund’s tax
liability
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Corporate vs Individual Trustee
•  If these Funds had corporate trustees
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The tax liability would be payable by the
corporate trustee rather than the individuals
The directors would only have a liability for any
debt the corporate trustee could not pay in very
limited circumstances (and not usually for
income tax assessment)
The cost to the individual trustees of the tax
liability far exceeded the cost of establishing a
corporate trustee
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IHAS AND STRUCTURING
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IHAs and structuring
•  In-house asset rule
•  Ungeared entities
•  Unconnected entities
•  SIS provisions and cases on activities in
interposed entities
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In-house Assets
•  5% limit
•  In-house asset = investment in (or loan to)
‘related party’ or ‘related trust’
•  ‘Related party’ or ‘related trust’ if controlled
by:
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member or
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standard employer sponsor
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and part 8 associates of either
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Unrelated entities
•  In-house asset rules only apply to a ‘related party/
trust’
•  ‘Related party/trust’ if ‘group’ has:
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Fixed entitlement > 50% of income/capital
‘Control’ of trustee/entity
Ability to appoint remove the trustee
•  ‘Control’ of trustee/entity
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Effective control - directions or wishes of the group
Majority of trustees?
Majority or directors?
Majority of shares in corporate trustee?
Tie breakers – casting vote?
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Unrelated entities (cont)
•  ‘Group’ - s70E(3)
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Member + part 8 associates
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Standard employer-sponsor + part 8 associates
•  Part 8 associates (s70A, 70B, 70C)
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Relatives
Tax law partnerships, other partners, spouses and
children
Other controlled entities
-  more than 50%
-  effective or practical control
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Unrelated Unit Trusts
•  Example A
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SMSF 1 & SMSF 2 are unrelated
Each SMSF is completely unconnected and
has 50% of units in unit trust
Trustee is a company
-  1 director from each SMSF
Unrelated
Unit Trust
-  no casting vote
SMSF 1
SMSF 2
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Unrelated Unit Trusts (cont)
•  Example B
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SMSF 1 & SMSF 2 want to set up an unrelated
unit trust - 50% of issued units each
A member of each carry on a legal practice in
partnership
Will the unit trust be a related trust?
Alternative: Their respective family trusts carry
on the legal practice in partnership
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Unrelated Unit Trusts (cont)
•  SIS Act does not apply (mostly but cases)
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Borrow & charge its assets
Invest in other entities, including related parties
& trusts
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Acquire assets from related entities
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Acquire multiple assets
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Alternative to borrowing arrangement
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Holloway, ZDDD v FCT, Montgomery Wools
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Limitations - Unrelated Unit Trusts
•  SIS Act – I thought it didn’t apply?
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Section 62 – Sole purpose test
Section 65 – Financial assistance
Section 109 - Arm’s length terms
•  Anti-avoidance
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Section 66 – related party acquisitions
Section 85 – in-house assets
Section 71(4) – ATO discretion
•  Can’t buy out other unitholder
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Ungeared entity exemption????
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Cases
•  ZDDD and Commissioner of Taxation
[2011] AATA 3
•  SMSF held units in pre 99 Unit Trust
•  Money lent from Trust to members
•  Loan was undocumented, unsecured and
no interest was accrued or paid
•  ATO found breaches of Sections 62, 65 and
109 - demanded rectification
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Cases Cont’d
•  Taxpayer offered interest repayment or non
cash lump sum at age 55 (the units)
•  Commissioner considered this insufficient
and issued notice of non-compliance
•  Trustee of the Fund offered enforceable
undertaking – Commissioner refused to
withdraw notice
•  AAT affirmed ATO decision
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Cases Cont’d
•  Montgomery Wools Case, 6 February 2012
•  Inter entity loans and UPEs – Fund,
discretionary trust and pre-99 Unit Trust
•  Notice of non-compliance affirmed by AAT
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No attempt to rectify/give enforceable u’taking
•  Breaches of sole purpose test, arm’s
length rules, in-house asset rules and
financial accommodation
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Cases Cont’d
•  Financial accommodation
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UPE owed to fund from unit trust
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Sale of asset, $ repaid related party debt
•  Sole purpose test
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Allowing unit trust asset to be used as security
for debt of related party
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Unit trust loan to related entities
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Sale of asset, $ repaid related party debt
•  Appeal to Federal Court
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Ungeared Unit Trusts
•  Not in-house asset
•  Strict Requirements (Regs 13.22B & 13.22C)
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no debt or charges
no loans, or investments in other entities
not acquired assets from related party (except business
real property)
not lease assets to related party, except brp
not carry on a business
arm’s length terms for all transaction
if breach, investments become in-house assets
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Ungeared Unit Trusts (cont)
•  Very restrictive
•  Limited assets only
•  If breach, the exemption:
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ceases to apply to the existing investment in
that entity
can never apply to any further investment in
that entity
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Ungeared Unit Trusts (cont)
•  Example
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SMSF acquires 100 units in Trust A in May
In August, Trust A borrows to acquire a
property
Ungeared entity exemption no longer applies units now an in-house asset
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Ungeared Unit Trusts (cont)
•  Very limited use
•  Benefits:
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SMSF can acquire units from a related party
Can be used in conjunction with other
structures:
-  Other related entities can acquire units (including
pre-1999 unit trusts and limited recourse trusts)
-  Can use borrowings to acquire units
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PROPERTY DEVELOPMENT AND
RELATED PARTY TRANSACTIONS
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Related party transactions
•  Arm’s length rules (section 109)
•  Acquisition of assets from related parties
(section 66)
•  Financial assistance (section 65)
•  Sole purpose (section 62)
•  Borrowing restrictions
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Arm’s length rules
•  Obtain evidence that SMSF could have
same deal from related party
•  The Trustee for the R Ali Superannuation
Fund and Commissioner of Taxation
•  How can we establish deal is arm’s length?
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Acquisition of assets
•  Prohibited unless
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Business real property
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Listed securities
•  Raw materials used in building?
•  Building services OK
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Goods as well that are “insignificant in value
and function” OK
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Financial assistance
•  Loan and financial assistance
•  Widely defined
•  Montgomery Wools – UPE not called is
financial assistance
•  Ties in with sole purpose and arm’s length
terms
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Sole Purpose Test
•  What is the SOLE purpose of the
investment
•  Create wealth for fund?
•  Or to give a benefit to related party?
•  Risk
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Borrowing
•  Also imposes limits
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SMSF cannot borrow to buy vacant land and
build building
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Joint ventures
•  Examples
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SMSF owns land and related party provides
services
-  Payment arrangements
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Related party owns land and SMSF provides
funding
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Joint ventures
•  What is a JV?
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Partnership?
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“Investment in”
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GST?
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Tax?
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Can it be a contribution?
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Joint ventures
•  SMSFR 2009/4
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Para 91 – JV is an “investment in”
•  In-house assets
-  “investment in” related party?
-  “loan to” related party?
-  anti-avoidance rules?
•  Financial accommodation
•  Sole purpose
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Building contract
•  SMSF owns land and contracts related
party to build
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Builder supply
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Acquiring what from builder?
-  Services
-  Building materials
-  Breach of section 66?
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Building contract
•  Plus agency agreement
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Builder is engaged as SMSFs agent to acquire
building supplies
SMSF does not acquire building supplies from
related party
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NTLG Minutes
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SMSFR 2010/1
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Thank you
Scott Hay-Bartlem
Partner
T 61 7 3231 2458
E scott.hay-bartlem@cgw.com.au
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