During 2005 to 2008, an SMSF accepted contributions and roll-overs in respect of a tax agent, his wife and 2 daughters — all of whom were trustees and members of the SMSF.
The SMSF trustees then lent the money to an intermediary company controlled by the tax agent which on-lent that money to the SMSF members and to entities in which a member had an interest. For all but one of the loans, there were no written loan agreements and security was not provided.
The Tax Office alleged that the intermediary company's object was to borrow money from regulated superannuation funds and to lend money to parties connected with those funds.
After an audit of the SMSF, the Commissioner issued the SMSF with a notice of non-compliance under s 40 of the SIS Act for contravening the following regulatory provisions:
- s 62 (sole purpose test);
- s 65(1)(b) (financial assistance);
- s 84 (in-house assets);
- s 109 (non-arm's length investment);
- s 52 (trustee covenants).
The trustees applied to the Tribunal for a review of the Commissioner's decision not to exercise his discretion under s 42A(5)(b) to treat the SMSF as a complying fund despite the contraventions. The trustees' application was based on the arguments that:
- the loans were not made to a related entity because the tax agent was not a director of the company continuously throughout the relevant period;
- the assets of the SMSF were ultimately returned safely; and
- another SMSF which made similar loans to the company was not issued a s 40 notice.
The Tribunal upheld the Commissioner's decision not to exercise his discretion under s 42A(5)(b) to treat the fund as a complying fund despite the contraventions.
- found that the loans were made to a related party and involved serious breaches of numerous regulatory provisions, including the sole purpose test;
- noted that a related party of an SMSF includes all members of the SMSF and their associates (which includes any company that a member controls or influences under s 70B).
- said that, to the extent that the loans were part of back-to-back arrangements to facilitate loans to other related parties or members, they could be regarded as part of an arrangement through which financial assistance was provided to the end recipients in breach of s 65.
Although the loans were ultimately repaid to the SMSF, the Tribunal said the breaches:
- were very serious;
- exposed 100% of the SMSF's assets;
- involved multiple contraventions over an extended period; and
- were designed (in part) to disguise the true relationships.
Also, the Tribunal commented that the trustee (as an accountant) ought to have known that such arrangements contravened the SIS Act.
Accordingly, the Tribunal ruled that this was not a case where the Commissioner's discretion in s 42A(5)(b) should be exercised at it would frustrate the wider objects of the SIS Act.
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please
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 AAT Case  AATA 44, Re Trustee for the R Ali Superannuation Fund and FCT (AAT, Ref No 2010/4319, O'Loughlin SM, 30 January 2012, to be reported in ATR).