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ATO now targeting Vestey Trust arrangements

The ATO has confirmed that certain schemes involving asset protection arrangements are now on its radar as they present a compliance risk for SMSFs. In particular, the concern surrounds schemes which claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust, commonly called a ‘Vestey Trust’. If trustees enter into schemes of this nature they risk contravening one or more super laws and penalties may apply.

This article summarises the types of asset protection schemes the ATO is concerned about, considers how other regulators are approaching the way Vestey Trust arrangements have been marketed and provides a timely reminder to trustees on relevant compliance obligations put at risk by the schemes.

Elizabeth Goutnik, Maddocks

What is a Vestey Trust?

A Vestey Trust is a discretionary trust that is established by a deed with the purpose of acquiring SMSF assets through an equitable mortgage. In theory, the Vestey Trust arrangement is designed to protect assets owned by the SMSF from creditors by having an asset protection trust (i.e. the Vestey Trust) take out an equitable mortgage over the relevant SMSF.

In practice, a promissory note is executed by the SMSF trustee in favour of the Vestey Trust for the purpose of creating the equitable mortgage. The mortgage is then secured by a caveat in favour of the Vestey Trust over the SMSF’s real property. As an alternative to a caveat, the Vestey Trust arrangement can also be supported by an SMSF’s cash holdings being transferred to a bank account in the name of the Vestey Trust.

Why is the ATO concerned about Vestey Trusts?

Vestey Trusts and asset protection arrangements have sparked concern within the ATO due to the compliance risks and potential contraventions of superannuation laws that such arrangements give rise to, and the applicable penalties for such compliance risks.

The superannuation system and superannuation laws already protect SMSF assets from creditors making the Vestey Trust arrangements unnecessary and subjecting SMSF trustees to unnecessary costs, complexity and compliance risk.

What are the complication risks for trustees in relation to Vestey Trusts?

There are four main compliance risks involved with Vestey Trust arrangements:

  1. an SMSF trustee may contravene superannuation laws by entering into a Vestey Trust arrangement and ‘charging’ an asset of the fund;

  2. a Vestey Trust arrangement may involve the SMSF trustee borrowing money in contravention of SMSF laws and regulations;

  3. a Vestey Trust arrangement may expose the SMSF assets to an unnecessary risk if it is not clear who owns the assets of the fund; and;

  4. a Vestey Trust arrangement may cause an SMSF to be maintained in such a way that would mean the fund no longer complies with the ‘sole purpose test’, being that the sole purpose of the SMSF is to provide retirement benefits to the members of the SMSF.

Vestey Trusts and misleading representations: the ACCC’s view

Not only do Vestey Trust arrangements pose compliance risks to SMSFs and SMSF trustees, they can also lead to claims of misleading and deceptive conduct. The Australian Competition and Consumer Commission (ACCC) have commenced proceedings against Master Wealth Control Pty Ltd (trading as the ‘DG Institute’) alleging that the DG Institute has engaged in misleading conduct in the sale, promotion and delivery of their Master Wealth Control Program. Through their Master Wealth Control Program, the DG Institute represented to consumers that a Vestey Trust would completely protect any asset in the trust from creditors and that the Vestey trust was “bulletproof” and “impenetrable”.

The DG Institute sought to rely on the Sharrment Pty Ltd v The Official Trustee in Bankruptcy (1988) 18 FCR 449 judgement with respect to asset protection under a Vestey Trust. However, that case did not concern a Vestey Trust and there is no precedent or case law to support the effectiveness of a Vestey Trust. As such, the ACCC is alleging that the DG Institute mislead consumers as the Vestey Trust did not provide the complete protection that DG Institute advertised their program would achieve.

The ACCC further allege that those that have purchased the Master Wealth Control program, with the intention of protecting their assets under a Vestey Trust arrangement, could face significant financial harm by relying on the misleading advice of the DG Institute.

What should an SMSF trustee do?

If an SMSF trustee is involved or may be involved in a Vestey Trust arrangement or asset protection scheme, the trustee is encouraged to make a voluntary disclosure to the ATO. If and when the ATO determine whether to take a compliance action or what compliance action may be appropriate for an SMSF trustee, the ATO will take into consideration that a voluntary disclosure was made by the trustee.

If you or your client would like to make a voluntary disclosure to the ATO, you can do so at SMSF Early Engagement and Voluntary Disclosure Services.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to a member of the Commercial Practice Group.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

Order related document packages

Superannuation Trust (SMSF)

Discretionary (Family) Trust

Discretionary Trust - Excluded Beneficiaries

SMSF Set Up + Register Corporate Trustee

Last revised on : 23-02-2023
 

Lawyer in Profile

Julia Tonkin
Julia Tonkin
Partner
+61 3 9258 3318
julia.tonkin@maddocks.com.au

Qualifications: BA, LLB, University of Melbourne

Julia is a Partner in Maddocks Corporate and Private Clients team. Julia has extensive expertise in:

  • estate planning, structuring for succession of ownership and control of private and family businesses.
  • charities and not-for-profit space.

Julia’s clients include high net worth individuals and families and privately held businesses.

Clients value Julia’s empathic, common sense yet technically sound approach to complex legal (and often interpersonal) issues.

She has been recognised as an Accredited Specialist by The Law Institute of Victoria with an accreditation in Wills & Estates Law. She has also been recognised in Doyles Guide for Wills, Estates & Succession Planning Law Recommended – Victoria in 2023.

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