Case alters financial assistance view

A recent Administrative Appeals Tribunal (AAT) ruling has demonstrated how an SMSF may fail its obligations to comply with superannuation law if financial assistance is provided to a related party of the fund in the course of a normal transaction.

In the case of Merchant v Commissioner of Taxation [2024], an SMSF trustee challenged his disqualification by the ATO, which claimed he had breached multiple sections of the Superannuation (Industry) Supervision (SIS) Act.

Specifically, the ATO cited a breach of section 65, which prohibits using SMSF resources to provide financial assistance to relatives or members in relation to acquiring shares from a controlled discretionary trust to realise a capital loss.

Although the AAT overturned the trustee’s disqualification, deeming him a fit and proper person with a low risk of future non-compliance, it upheld the ATO’s finding that contraventions of the SIS Act had occurred.

DBA Lawyers senior associate Shaun Backhaus pointed out SMSFs with complex structures, such as those involving trusts, could unintentionally break the law by purchasing listed securities from a related party at market value, a typically common practice.

“The AAT said that this transaction was to the detriment of the fund in that the shares were unlikely to increase substantially in value and the purchase led to a risky and undiversified fund,” Backhaus told attendees of a DBA Lawyers webinar recently.

“I do think this [ruling] is a bit concerning [because] it leads you down the path of thinking that any dealing with a related discretionary trust would result in a contravention.

“They haven’t said it’s necessary that the fund needs to have its own detriment to have given financial assistance to someone else. That’s counter to the way we usually think about these things with lending or financial assistance to a member or related party because we usually think that to do that, the fund needs to be in a worse position.”

While he acknowledged the case does not set a legal precedent, the outcome provides an example of how financial assistance may be treated at the tribunal.

“If you’re buying listed shares at the prevailing market value that day, it seems here that could be a contravention of section 65 just because you’ve increased the value of that family trust,” he noted.

“This could change the way we give advice on section 65 and the meaning of financial assistance. It is something we should pay attention to and think about if clients are doing this sort of thing.”