A new ATO ruling that considers the exertion of sufficient influence could be used against SMSFs utilising a 50/50 unit trust structure, an SMSF legal expert has warned.
DBA principal Dan Butler said the release of the ATO’s Law Companion Ruling (LCR) 2020/3 in December 2020 did not appear to have any direct relevance to SMSFs, but its commentary on the sufficient influence, based on a case against BHP Billiton heard in the High Court, could be extended to the relationships within SMSF trusts.
“The ruling relates to large overseas pension funds drawing dividend and interest income from Australia and new legislation from mid-2019 tightened the withholding tax concessions available to them,” Butler told selfmanagedsuper.
“It also limits any form of influence those funds can have over the dividend or interest payer and applies a ‘sufficient influence test’, which can be extended to SMSFs.”
The test within the LCR considers who may be able to exert sufficient influence over a decision maker and whether any party or associate of a party was exerting sufficient influence over the decision maker for their own benefit.
Butler added this test could be applied to the relationships between SMSFs using a 50/50 or unrelated unit trust structure and could possibly include all parties, and their associates, connected to the structure.
“My concern is that advisers can recommend a 50/50 unit trust structure but they are not fully qualifying or understanding how sufficient influence may occur, and now, for the first time, the ATO has articulated their view on the use of sufficient influence,” he said.
While the ATO’s view had been given in the context of withholding tax, it started to put “meat on the bone” in regards to sufficient influence within SMSF arrangements, he said.
He said while section 70E of the Superannuation Industry (Supervision) Act (SIS Act) had defined what sufficient influence over a trust or control of a trust meant in terms of superannuation, and when it was considered to have taken place, there was limited case law to provide background on how this could be applied by the ATO.
“The LCR moves beyond where sufficient influence may come from to also include whether a decision maker is obliged to act according to the directions of another entity and references similar language to the SIS Act from the case of BHP Billiton Limited vs Commissioner of Taxation, heard in the High Court in early 2020,” he said.
“This has application to SMSFs because BHP had a subsidiary company and its directors were broadly found to be doing what they were told from above, and those directions were not challenged and so in practice it was a lame-duck scenario.
“When it comes to looking at a 50/50 unit trust in light of this ruling, if one party is active and the other is passive, who has the sufficient influence?
“If an SMSF developer is being told what to do by their financier, who is exerting control over that 50/50 arrangement?”
