ATO, Investments

AAT decision highlights ATO strategy focus

SMSF investments ATO audit

A failed court appeal has revealed the ATO’s ongoing focus on investment strategies and ensuring transactions meet the requirements of super legislation.

An SMSF making any form of investment must ensure it matches the fund’s strategy, but also will pass any audit and ATO scrutiny brought against it, an SMSF auditor has warned.

Baumgartner Super director David Burrows said the issue of complying with an the investment strategy of an SMSF, as well an ensuring investment transactions met audit and ATO standards, was drawn out in the recent case of Merchant and Commissioner of Taxation (2021) on 19 April.

Burrows said, in a post on his firm’s website, that the applicants in the case had been previously disqualified from acting as trustees of an SMSF by the ATO for breaches of section 62 (sole purpose test) and section 65 (financial assistance to the members) of the Superannuation Industry (Supervision) (SIS) Act and regulation 4.09 (investment strategy operating standard) of the SIS Regulations.

He noted the case, which took place before the Administrative Appeals Tribunal (AAT), only sought an application to adjourn the disqualification decision, but in deciding to refuse the application, the AAT made particular mention of the need for an SMSF trustee to “give effect to” their investment strategy.

“The decision of the AAT notes the ATO found the trustee’s acquisition of listed shares in Billabong International from a related family trust had breached regulation 4.09 as the trustee had not given effect to their investment strategy,” he said.

“A focus only on the ‘give effect to’ requirement of the regulation indicates the ATO did not find a problem with the way the investment strategy was constructed. It therefore appears the trustee made an investment decision which didn’t align with the strategy, and hence they didn’t give effect to it.”

He added this breach pointed to a possible lack of attention being given to the strategy and despite the transaction taking place in September 2014 before the increased focus on strategies, it was avoidable as the strategy could have been updated to align with the transaction.

The case also highlighted the ATO may go beyond the areas covered by an audit when examining an investment transaction, he noted.

He said while the transaction was from a related party, it appeared to have taken place at market value as this was not cited as a reason for disqualification in the case before the AAT.

Rather, the trustee was found to have breached sections 62 and 65 of the SIS Act as it appeared the family trust received a tax benefit from the transaction by realising capital losses to offset against other gains, he said.

“I find it extremely interesting to hear of an instance where the ATO has determined that an acquisition from a related party, which didn’t breach section 66, has breached other sections of the [SIS Act]. This is because as auditors we would normally look for a transfer of a listed share to be at market value and that is where our audit work would end,” he said.

“I believe it would be nigh on impossible for an SMSF auditor to determine a breach of the sole purpose test in this instance as the auditor would not delve into all the possible reasons for the transfer and would not analyse the tax position of the other entities in the group.

“The outcome of this case highlights that just because an SMSF auditor has reasonably formed an opinion that a transaction was free from compliance issues, trustees still need to be aware of the possibility of the ATO coming to an alternative conclusion when the transaction is approached from a different angle.”

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