Taxpayer Alert TA 2009/16: Circumvention of in-house asset rules by self-managed superannuation funds using related party agreements
Date of issue: 10 June 2009
Status: Current


Description: The Taxation Office view on this arrangement is set out in Self Managed Superannuation Funds Ruling SMSFR 2009/4 This document incorporates revisions made since original publication. View its history and amending notices, if applicable. | This Taxpayer Alert describes an arrangement where a self-managed superannuation fund (SMSF) enters into an agreement (sometimes referred to as a joint venture agreement) with a related trust to acquire assets such as rental property in order to obtain certain taxation and superannuation benefits. The Tax Office is concerned that such an arrangement may breach the superannuation in-house asset rules. | Subject to limited exceptions, an investment in or loan to a related party by an SMSF is an in-house asset. SMSF trustees are prohibited from acquiring an in-house asset if, after the acquisition, the market value of the SMSF's in-house assets exceeds 5% of the total market value of the fund's assets. SMSFs are also prohibited from maintaining a level of in-house assets in excess of the 5% limit. Where in-house assets for an SMSF exceed the 5% limit, the trustee needs to rectify the breach, usually within 12 months. | The contravention of these provisions may result in the SMSF becoming a non-complying superannuation fund for tax purposes, i.e. subject to 45% tax rates on its income (and assets other than undeducted contributions in the year that the fund becomes non-complying). In certain circumstances, the fund's trustee may also be liable to civil or criminal consequences. | This alert applies to arrangements with features that are substantially equivalent to the following: 1. A trustee of an SMSF ('the trustee') pays a fee to an organiser ('the organiser') to set up an agreement, possibly referred to as a 'joint venture agreement' ('the agreement'), between the SMSF and a related trust ("the trust"). 2. The trust may be a hybrid trust of the type described in Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts and Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts . 3. The organiser claims that the purpose of setting the agreement is to buy investments to provide mutual financial rewards to the SMSF and the trust. 4. Under the agreement, the SMSF contributes capital to fund the acquisition and possible development of an asset ('the asset'), typically real property, which is acquired by the trust. 5. Typically the agreement would state that the SMSF acquires no legal, equitable or other interest in the asset. 6. In exchange for the capital contribution, the agreement provides the SMSF with rights to a proportionate share of the profits from the commercial usage of the asset from the trust. Therefore, the return on the investment, and the investment risk, is dependent on the trust. 7. The trust uses the funds from the SMSF (e.g. 15%) and a borrowed amount (e.g. 85%) to purchase and potentially develop the asset. 8. The borrowed amount the trust puts towards the investment in the asset (e.g. 85%) may come from the following source(s): • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. The asset may be used as security for the above borrowing(s). 9. Legal title in the asset lies with the trust and not the SMSF. 10. In some cases, the asset may be leased to a member or members either at market rate or below market rate. 11. The benefits arising from the investment i.e. rents and profits from the sale of the asset are split in proportion to the risk capital invested by the SMSF and the trust based on gross proceeds (e.g. 15% to the SMSF and 85% to the trust). The trust pays all expenses. 12. The SMSF can make further capital contributions to the arrangement via variation/amendment to the agreement to increase its financial risk. 13. The organiser may allege that the arrangement falls outside previous negative Tax Office view (such as ATOID 2006/335) on similar arrangements without any qualification regarding materially different facts. 14. The organiser charges a fee for establishing this arrangement, based upon the perceived commercial advantages of the promoted superannuation regulatory and taxation benefits. | 1. A trustee of an SMSF ('the trustee') pays a fee to an organiser ('the organiser') to set up an agreement, possibly referred to as a 'joint venture agreement' ('the agreement'), between the SMSF and a related trust ("the trust"). 2. The trust may be a hybrid trust of the type described in Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts and Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts . 3. The organiser claims that the purpose of setting the agreement is to buy investments to provide mutual financial rewards to the SMSF and the trust. 4. Under the agreement, the SMSF contributes capital to fund the acquisition and possible development of an asset ('the asset'), typically real property, which is acquired by the trust. 5. Typically the agreement would state that the SMSF acquires no legal, equitable or other interest in the asset. 6. In exchange for the capital contribution, the agreement provides the SMSF with rights to a proportionate share of the profits from the commercial usage of the asset from the trust. Therefore, the return on the investment, and the investment risk, is dependent on the trust. 7. The trust uses the funds from the SMSF (e.g. 15%) and a borrowed amount (e.g. 85%) to purchase and potentially develop the asset. 8. The borrowed amount the trust puts towards the investment in the asset (e.g. 85%) may come from the following source(s): • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. The asset may be used as security for the above borrowing(s). 9. Legal title in the asset lies with the trust and not the SMSF. 10. In some cases, the asset may be leased to a member or members either at market rate or below market rate. 11. The benefits arising from the investment i.e. rents and profits from the sale of the asset are split in proportion to the risk capital invested by the SMSF and the trust based on gross proceeds (e.g. 15% to the SMSF and 85% to the trust). The trust pays all expenses. 12. The SMSF can make further capital contributions to the arrangement via variation/amendment to the agreement to increase its financial risk. 13. The organiser may allege that the arrangement falls outside previous negative Tax Office view (such as ATOID 2006/335) on similar arrangements without any qualification regarding materially different facts. 14. The organiser charges a fee for establishing this arrangement, based upon the perceived commercial advantages of the promoted superannuation regulatory and taxation benefits. | • the trust borrows an amount from a financial institution; and/or • an individual borrows an amount from a financial institution and subscribes units in the trust. | The Tax Office considers that arrangements of this type give rise to the following issues: | Superannuation regulatory issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to the application of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and Regulations, being whether: a. the in-house asset provisions may not be met as there has been an investment by the SMSF in a related party which is over the 5% limit; b. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset rules, may have been breached; c. the restriction on SMSFs intentionally acquiring assets from a related party under section 66 of the SIS Act may have been breached; and d. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members. | a. the in-house asset provisions may not be met as there has been an investment by the SMSF in a related party which is over the 5% limit; b. section 85 of the SIS Act, which prohibits a fund from entering into any scheme to avoid the application of the in-house asset rules, may have been breached; c. the restriction on SMSFs intentionally acquiring assets from a related party under section 66 of the SIS Act may have been breached; and d. the sole purpose test under section 62 of the SIS Act may have been breached e.g. where a purpose of the fund investment is to obtain a present day benefit for fund members or a related party, rather than for the purpose of providing retirement benefits for the members. | Taxation issues | The Tax Office considers that arrangements of this type give rise to the following issues relevant to taxation laws, being whether: e. income derived by the SMSF under the agreement may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore is subject to a higher rate of tax; f. the borrowing expense incurred by the individual taxpayer or the trust may be deductible under section 8-1 or section 25-25 of ITAA 1997, and the extent to which it is deductible; g. any capital gains tax consequences may arise e.g. when trust interests are redeemed, new interests are issued or upon the disposal of the property; h. any fee or commission paid should not be allowable as a deduction by the SMSF for that income year; i. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement; j. any fee or commission received by the organiser/s of this arrangement should be included as assessable income for the relevant income year; and k. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | e. income derived by the SMSF under the agreement may be 'non-arm's length income' for the purposes of section 295-550 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore is subject to a higher rate of tax; f. the borrowing expense incurred by the individual taxpayer or the trust may be deductible under section 8-1 or section 25-25 of ITAA 1997, and the extent to which it is deductible; g. any capital gains tax consequences may arise e.g. when trust interests are redeemed, new interests are issued or upon the disposal of the property; h. any fee or commission paid should not be allowable as a deduction by the SMSF for that income year; i. the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to the arrangement; j. any fee or commission received by the organiser/s of this arrangement should be included as assessable income for the relevant income year; and k. any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953). | The Tax Office is currently examining these arrangements. | The Tax Office issued Draft Self Managed Superannuation Funds Ruling SMSFR 2008/D5 Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993 which outlines when a transaction between the SMSF and a related party will be regarded as an investment in that related party (refer paragraph 17 of the draft ruling) Note 1: Base penalties of up to 75% of the tax avoided can apply where someone makes a false or misleading statement to the Commissioner. Reductions in base penalty will be available if the taxpayer makes a voluntary disclosure to the Tax Office. If you have any information about the current arrangement, phone us on 0800 060 0662. Tax agents wanting to provide information about people or companies who may be promoting arrangements covered by this Alert should call 13 72 86 (Fast Key Code 3 4 ). Note 2: Penalties of up to 5,000 penalty units for individuals, 25,000 penalty units for bodies corporate or up to twice the amount of consideration received or receivable may apply to promoters of tax exploitation schemes under Division 290 of Schedule 1 to the TAA 1953. The Commissioner can also apply to the Federal Court of Australia for restraining and performance injunctions against promoters where prohibited conduct has occurred, is occurring or is proposed. Note 3: Where appropriate, section 167 of the ITAA 1936 may be used to determine the amount of taxable income upon which the taxpayer should be assessed, see Law Administration Practice Statements, PSLA 2007/7 and PSLA 2007/24.





Related documents: SMSFR 2009/4 | Taxpayer Alert TA 2008/3 Uncommercial use of certain trusts | Taxpayer Alert TA 2008/4 Self-managed superannuation funds deriving income from certain uncommercial trusts | PS LA 2007/7 | PS LA 2007/24 | ATO ID 2006/335 | Section 62 | Section 66 | Section 85 | Section 167 | Part IVA | Section 8-1 | Section 25-25 | Section 295-550 | Division 290 of Schedule 1 | TA 2008/3 | TA 2008/4

Updated Tax Agent tip off hotline number | Updated ATO tip-off hotline numbers