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SMSF and Financial Assistance

The Tax Office has released an SMSF Ruling in which it explains the prohibition on trustees of SMSFs giving financial assistance to a member of a fund (or a relative of the member) using the resources of the fund.

The Ruling reinforces that providing financial assistance to a member (or a relative of the member) will contravene the superannuation legislation, regardless of whether such assistance was requested by the member or given through a third party.

According to the Ruling, financial assistance includes any arrangement or transaction whereby the assets of the SMSF are converted into other assets, diverted, diminished or put at risk, or there is prejudice to the financial position of the SMSF.

Using resources of the fund
For the ruling to apply, the assistance must be given using the resources of the fund. It is the Commissioner's view that the resources of an SMSF are used if an arrangement or transaction relies on the assets of the SMSF, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement or transaction. Therefore, financial assistance using the resources of the SMSF can include any arrangement or transaction whereby the assets of the SMSF are converted into other assets, diverted, diminished or put at risk, or there is prejudice to the financial position of the SMSF.

Assistance given to member/relative
While the assistance given must be to "a member of the fund or a relative of a member of the fund", the Tax Office states that the ruling can apply if the financial assistance is indirectly given to a member or relative through a third party. That is, the financial assistance can be indirectly given to a member or relative if the SMSF enters into an arrangement with some other entity whereby SMSF resources are used to give financial assistance to a member or a relative through that other entity.

Examples of contraventions

  • giving a gift of an SMSF asset to a member/relative;
  • selling an SMSF asset for less than its market value;
  • purchasing an asset for greater than its market value;
  • acquiring services in excess of what the SMSF requires;
  • paying an inflated price for services acquired;
  • forgiving a debt owed to the SMSF by a member/relative;
  • releasing a member/relative from a financial obligation owed to the SMSF, including where the amount is not yet due and payable;
  • delaying recovery action for a debt owed to the SMSF by a member/relative;
  • satisfying, or taking on, a financial obligation of a member/relative;
  • giving a guarantee or an indemnity for the benefit of a member/relative;
  • giving a security or charge over SMSF assets for the benefit of a member/relative.

SMSF and Sole Purpose Test
The Tax Office has also released an SMSF Ruling, which outlines the Commissioner's approach to the application of the sole purpose test in the superannuation legislation.

The objective of the sole purpose test is to limit the provision of superannuation benefits to a range of prescribed retirement or retirement-related circumstances, such as on or after a member retiring or attaining 65 years of age. Where an SMSF is maintained for other purposes, it will contravene the sole purpose test.

The Tax Office says that in determining the purpose for which an SMSF is being maintained requires a survey of all of the events and circumstances relating to its maintenance.

The Ruling notes that investments such as works of art, antiques, classic cars and wine will, generally, pose particular issues in relation to the application of the sole purpose test.

Factors suggesting a contravention

Factors the Commissioner considers weigh in favour of a conclusion that an SMSF is not being maintained in accordance with the sole purpose test are:

  • the trustee negotiated for, or sought out, the benefit (even if the additional benefit is negotiated for, or sought out, in the course of undertaking other activities that are consistent with section 62);
  • the benefit has influenced the decision-making of the trustee to favour one course of action over another;
  • the benefit is provided by the SMSF to a member or another party at a cost or financial detriment to the SMSF; or
  • there is a pattern or preponderance of events that, when viewed in their entirety, amount to a material benefit being provided that is not specified under section 62.

Factors suggesting no contravention

Factors that weigh in favour of the Commissioner reaching a conclusion that an SMSF is being maintained in accordance with the sole purpose test, despite the provision of benefits not specified in section 62, are:

  • the benefit is an inherent or unavoidable part of other activities that are consistent with the provision of benefits under section 62;
  • the benefit is remote or isolated, or is insignificant (whether it is provided once only or considered cumulatively with other like benefits) when assessed in light of other activities undertaken by the trustee that are consistent with section 62;
  • the benefit is provided by the SMSF on arm's length commercial terms (e.g. if the benefit is provided at market value), consistent with the financial interests of the SMSF and at no cost or financial detriment to the SMSF;
  • all of the activities of the trustee are in accordance with the covenants set out in section 52 of the SIS Act (e.g. in the best interest of the beneficiaries and exercised with the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally obliged to provide);
  • all of the SMSF's investments and activities are undertaken as part of, or are consistent with, a properly considered and formulated investment strategy.

Examples

The Ruling notes that investments consisting of collectables and other boutique items such as works of art, antiques, jewellery, classic cars and wine, pose particular issues in relation to the application of the sole purpose test. The Commissioner considers that these kinds of assets lend themselves to personal enjoyment and, therefore, can involve significant "current day benefits" being derived by those using or accessing the asset. As a result, the Commissioner says trustees should be in a position to show (e.g. by reference to independent expert opinion) how acquiring assets of this kind involves a reasonable investment for the SMSF.

The Ruling sets out 16 examples demonstrating the Commissioner's approach to determining whether the provision of an incidental benefit amounts to a breach of the sole purpose test. The examples consider SMSF investments in:

  • holiday apartments through a property syndicate involving incidental upgrade rights;
  • shares in a golf club with assignable membership rights attached;
  • the use, lease and loaning of artwork;
  • shareholder discount cards (which result in reduced dividend rights);
  • instalment warrant arrangements involving limited recourse borrowing from a related party at excessive rates; and
  • overseas properties that come with reimbursement of travel expenses incurred on inspecting them.

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