ATO warns against asset protection scheme use

asset protection scheme

The ATO has warned SMSF trustees to avoid using schemes that offer to protect assets within their fund via the use of an external trust.

The ATO has warned SMSF trustees to avoid schemes that offer protection for assets within their fund, noting they are unnecessary under superannuation law and urging trustees to voluntarily disclose any usage of such schemes.

In an update on its website directed to trustees, the ATO stated: “Certain schemes involving asset protection arrangements are on our radar as they present a compliance risk for self-managed super funds.

“The schemes we are concerned with claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust, commonly called a vestey trust.”

The regulator added these trusts were discretionary trusts established by deed and were supposedly able to acquire the equity in an SMSF’s assets through an equitable mortgage.

“The equitable mortgage is supported by the execution of a promissory note by the SMSF to the vestey trust. This recognises a debt is owed by the SMSF to the vestey trust,” it stated.

“The mortgage is also supported by a caveat by the vestey trust over the SMSF’s real property. The arrangement can also allow a transfer of the SMSF’s cash holdings to a bank account in the name of the vestey trust.”

It said that where SMSF trustees enter into these arrangements, they may contravene superannuation laws by giving a charge over a fund asset, the arrangement may involve the borrowing of money by the SMSF trustee or cause the SMSF to be maintained in a way that breaches the sole purpose test.

“The super system already protects SMSFs from creditors, so these schemes also put funds at unnecessary risk,” it said.

“If trustees are already involved in one of these schemes and think it contravenes the super laws, they should make a voluntary disclosure. We will take this into account when determining any compliance action.”

Vestey trusts were listed as one of a number of schemes the ATO was also watching in regards to tax-avoidance via SMSFs, with the regulator encouraging financial advisers to avoid their use and report any schemes of concern they may come across.

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