The release of Taxpayer Alert 2008\/12 has highlighted the need for SMSF trustees to act on arm\u2019s length terms at all times when dealing with a related party. The Alert focuses on benefits derived by an SMSF by way of non-cash contributions from members which may circumvent contributions limits.<\/p>\n
In summary, a member can make up to:<\/p>\n
The ATO is concerned that certain benefits conferred on funds may in effect circumvent these caps. The ATO recognises the following as areas of concern<\/p>\n
Funds involved in these activities risk these benefits being treated as contributions which could lead to significant tax if the member\u2019s caps are exceeded. Other issues could potentially arise, such as part of the fund\u2019s income being taxed at 45% as \u2018non-arm\u2019s length income\u2019 (aka \u2018special income\u2019) under section 295-550 of the ITAA 1997.<\/p>\n
Impact on SMSF borrowing arrangements<\/em><\/p>\n SMSF trustees that borrow to acquire land may wish to improve or develop the land to enhance its value. However, the borrowing laws provide that trustees can only borrow to \u2018acquire\u2019 an asset and therefore the ATO has concerns that borrowing to improve or develop land is not a borrowing for an \u2018acquisition\u2019.<\/p>\n Many SMSF members or their related parties may therefore be tempted to pay for property development from their own pocket while the fund simply borrows to buy the land. Trustees must take care to ensure the fund is not deriving a benefit or else risk the payment of the development costs being treated as a contribution.<\/p>\n SMSFs with borrowings supported by member guarantees should also be mindful of this issue. Members must consider whether a deemed contribution could arise if their SMSF defaults on its loan repayments and the member guarantors pay the shortfall without seeking to recover these costs from the fund (or waiving their right to do so).<\/p>\n SMSFs with investments in related unit trusts may have unpaid present entitlements (\u2018UPE\u2019), eg, the trust has made paper distributions without having paid any money to the unitholders.<\/p>\n These UPEs in some cases may sit as book entries for some years. We have also come across a number of UPEs that have supposedly been reinvested by the SMSF back into the unit trust but have found inadequate documentation for them.<\/p>\n We have also seen many reinvestments undertaken based on $1 per unit when the value of the unit trust has increased markedly and could be 2-3 times that amount per unit if the unit trust deed was followed.<\/p>\n These issues can result in serious problems, including:<\/p>\n Accordingly, it is important to check SMSFs\u2019 balance sheets to ensure that either there are no UPEs or if there are, these are in compliance with the SIS Act, etc.<\/p>\n If it is intended to reinvest an UPE, it is vital that appropriate paperwork is created that extinguishes the UPE and results an issue of new units. The trust deed of the unit trust must be carefully followed in this regard and an appropriate valuation of units undertaken.<\/p>\n Given the fast approaching deadline of 30 June 2009 for reinvestment in related party geared unit trusts, any reinvestment must generally be made before this deadline. Any UPEs as of 1 July 2009 will generally not be capable of being reinvested and may constitute an-house asset under SMSFR 2008\/D1.<\/p>\n Naturally, at DBA we have extensive experience with advising and documenting these matters.<\/p>\n For further Information please contact:<\/p>\n DBA LAWYERS PTY LTD<\/strong> (ACN 120 513 037) Level 1, 290 Coventry Street, South Melbourne Vic 3205 DBA News contains general information only and is no substitute for expert advice. Further, DBA is not licensed under the Corporations Act 2001<\/em> (Cth) to give financial product advice. We therefore disclaim all liability howsoever arising from reliance on any information herein unless you are a client of DBA that has specifically requested our advice.<\/p>\n<\/div>\nDownload as PDF<\/a><\/span>\n","protected":false},"excerpt":{"rendered":"SMSF and Trust Distributions<\/h2>\n
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\nPh 03 9092 9400 Fax 03 9092 9440 dba@dbalawyers.com.au<\/a> www.dbalawyers.com.au<\/a><\/p>\n