The ATO may become more mindful of SMSFs that lease residential property assets to related entities using smaller trust structures to circumvent in-house asset rules in light of the Aussiegolfa decision, an SMSF expert warned.
SuperConcepts technical services and education general manager Peter Burgess said the tax office may be concerned SMSFs could look to use smaller unit structures and new trust structures to lease assets to related entities to overcome the in-house asset rules.
Burgess said while widely held unit trust structures are acceptable due to a specific carveout in the legislation, SMSFs that attempt to use smaller structures may come under heavy scrutiny from the ATO under the anti-avoidance provisions to the in-house asset rules under section 85 of the Superannuation Industry (Supervision) (SIS) Act 1993.
“I expect the ATO have more to say about arrangements which are designed to artificially reduce the fund’s in-house assets in their decision impact statement,” he told selfmanagedsuper.
“It could be just two unrelated entities. So the SMSF could get it with an unrelated entity setting up a trust structure, structured in a way to ensure the SMSF is not entitled to more than 50 per cent of the capital income. It’s not in a position to appoint or remove the trustee of the trust and can’t significantly influence the trustees. Technically that is not a related trust under the SIS Act … there’s not been a breach of the in-house asset rules.”
While it may appear on face value there is no breach of the in-house asset rules, he warned it is a dangerous path for SMSFs to take due to the anti-avoidance provisions.
His comments come after the ATO yesterday announced it had informed Aussiegolfa, the trustee of the Benson Family Super Fund (BFSF), the commissioner will not be seeking special leave to appeal the full Federal Court’s decision in Aussiegolfa Pty Ltd v Commissioner of Taxation.
The full Federal Court handed down a favourable decision to Aussiegolfa regarding the leasing to a related party of a property held in a sub-fund where an SMSF is the owner of units in the sub-fund.
Burgess said the decision draws a distinction between motive and purpose when it comes to an investment adhering to the sole purpose test of providing income for retirement.
“We now have this distinction that the court has [drawn] … we know that it’s a related entity, derives a benefit from the accommodation and commercial rates on commercial terms, it’s not considered to be a financial benefit but merely an incidental benefit, so there’s potentially no breach of the sole purpose test,” he said.
“So in the past SMSFs have avoided using these types of structures because of fear they would breach the sole purpose test. Given that this court case has come out, there may be a tendency for SMSFs to use these types of structures to get around in-house asset rules.”
The Federal Court’s original ruling the sub-fund was a related trust of BSFS was upheld on appeal.
“Where it landed is to say, well, there’s not an issue with the sole purpose test, but you’ve still got an issue with the in-house assets test. So we may see SMSFs trying to get around in-house asset rules by using these trust structures,” Burgess said.