Ruling Compendium

From the contents of the ruling, it can be inferred that residential property owned by a superannuation fund can be rented out to a member or relative of a member provided the rent is a properly managed commercial level of rent. It should be made clear in the Ruling whether this is the case.

Example 15 deals with the leasing of a residential property by an SMSF to a family member. The scenario described in this example does not amount to the giving of financial assistance, however paragraph 173 states that the residential property is most likely an in-house asset and therefore subject to the provisions in Part 8.

Trustees also need to consider the sole purpose test in section 62 - see footnote 129, paragraph 173.

Other than noting the potential for other provisions to apply, the application or contravention of other provisions is beyond the scope of this Ruling. This Ruling focuses on when a trustee or investment manager provides a member or their relative with financial assistance using the resources of the SMSF.

ATO ID 2002/659 and ATOID 2004/92 are also relevant to this issue.

ATOID 2004/92 states that a contravention of section 66 occurs if an SMSF purchases residential property, which is managed by a property manager, from a member of the SMSF.

ATOID 2002/659 states that a contravention of Division 3 occurs if an SMSF leases residential property to a member/s of the SMSF and the value of that leased property compared to the total assets of the SMSF exceeds the in-house asset limits.

See also draft SMSF Ruling SMSFR 2008/D3 which discusses residential property in the business real property context.

With regard to Example 9 and the comment

'Paragraph 65(1)(b) would also be contravened....if the rent is allowed to fall into arrears'.

In commercial practice with non-related parties rent can and does fall into arrears. Further explanation maybe required with the amount and period of arrears relevant to a breach of 65(1)(b). Additionally, s109 would appear to be the more appropriate section for reporting of such arrears.

Paragraph 111 explains that delay in taking recovery action for a debt owed by a member or relative of a member is financial assistance to that member or relative whereas pursuing the member or relative for the debt would not be the giving of financial assistance even though there is an amount outstanding.

See also paragraphs 114 and 115 of Example 5.

These changes to the Ruling make it clear that the mere fact rent has fallen into arrears does not mean that the trustee or investment manager is giving the member or relative financial assistance. Rather, financial assistance is given by the trustee or investment manager if they in effect permit the rent to remain unpaid.

With regard to example 13 the facts appear to be:

1.

The fund purchases stoves etcetera from an unrelated party - appears to be no breach of SISA (investment strategy permitting).

2.

The fund leases these items at commercial rates to the member's partnership - appears to be no breach provided less than 5% of the fund's in house assets.

3.

Sale to related party at end of lease on arms length terms - appears to be no breach.

The example indicates that these facts together cause a breach of 65(1)(b). Accordingly, the issue is at what point does the breach of 65(1)(b) occur and should be reported.

Footnote 35 has been expanded to further explain the reporting requirements for auditors contained in section 129. That is, an auditor of an SMSF is required to report contraventions immediately after forming the opinion that it is likely that a contravention may have occurred, may be occurring or may occur in relation to the SMSF.

Currently, the 2007 instructions on how to complete the auditor/actuary contravention report (ACR) (NAT 11299-06) state:

Date when contravention first occurred

Complete the date when the contravention first occurred. This may be in an earlier financial year than the one being audited. For example, if the fund borrowed money in an earlier financial year and the borrowing may have continued into the financial year being audited. In this situation you must include the date from the earlier financial year.

It is not considered appropriate to deal further in this Ruling with the issue of when an auditor is required to report a contravention. However, the Tax Office is considering this comment.

Paragraphs 67-72 provide guidance on how and why the Commissioner considers financial assistance can be given indirectly. However, these paragraphs do not appear to support the lifting of the corporate veil in Example 20.

Example 20 indicates where a SMSF loans money to a related company, the shareholders are considered recipients of the financial assistance. While we are aware that nothing in part 8 limits the operation of section 65, this reasoning would appear to severely restrict the operation of the 5% limit on in-house assets.

Extending the reasoning, any loan to a related company of which the members are shareholders would be a breach of 65(1)(b), despite being on commercial terms and less than 5% of fund assets.

Further justification is required to explain why the corporate veil is lifted.

The change in view is now reflected at paragraphs 211 to 213 and illustrated by Example 24 (paragraphs 214 to 216). Financial assistance is not indirectly given to members, or relatives of members, of an SMSF that are shareholders in a company merely because the SMSF gives financial assistance to that company. Although an SMSF giving financial assistance to a company may not contravene paragraph 65(1)(b), other relevant considerations include the sole purpose test in section 62, the investment strategy requirements in section 52 and regulation 4.09 of the SISR, the restriction on acquiring assets from a related party in section 66, the provisions concerning the in-house asset limits in Part 8 and the arm's length requirements in section 109 - see paragraph 212.

Further guidance is also given to determining whether financial assistance is given indirectly by an SMSF to a member or a relative of a member. See the indirect financial assistance section of the Ruling at paragraphs 187 to 216 and, in particular, paragraphs 190 to 194.

The form of the information is clearly targeted at practitioners who are familiar with this form of guidance. There may be a need to communicate it in a different format for use by others.

The Tax Office is considering this comment.

However, in this Ruling the following changes have been made:

•

additional examples added to assist people in understanding the views expressed in the Ruling (see issue 15 below);

•

minor revisions made to other examples to improve the explanation and clarify the facts;

•

a table summarising all the Examples in the Ruling has been added (see Appendix 1);

•

a Glossary has been added (see Appendix 3) to explain certain terms used in the Ruling; and

•

more generally, the Ruling has been revised to improve its structure and readability.

The ruling discusses the single issue of giving financial assistance using the assets of the fund and has failed to address other matters which may result in breaches of the SISA.

The ruling needs to clearly state that only paragraph 65(1)(b) has been considered and that the cases presented may be prohibited by other areas of the legislation. For example, Example 21 (paragraphs 163 to 165 of SMSFR 2007/D2) does not set out sufficient information for the user of the ruling to understand that the loan is only possible if the investment in the related company does not exceed 5% of the fund assets.

Given the change in view as explained at issue 4 above this example is redundant.

Paragraph 2 states that the Ruling does not provide the Commissioner's views on how other SISA or SISR provisions apply to any of the arrangements discussed in the Ruling.

Other provisions that may apply to a particular example are noted throughout the Ruling either in the text or as footnotes. The new summary table of examples (Appendix 1) also highlights other provisions that may be applicable. However, as this Ruling is about the application of paragraph 65(1)(b) only see also the cautions that have been added at paragraphs 28 and 85.

Examples given in the Ruling are not restricted to examples that contravene only paragraph 65(1)(b) as an arrangement can contravene more than one provision of the SISA and the SISR. It is also useful to make it clear when paragraph 65(1)(b) is not contravened even though the arrangement may contravene another provision(s), for example, see paragraphs 211 to 216.

The ruling does not address the issue of how to value a financial benefit. For example is it the value of the loan or the loan plus accrued interest?

This issue is beyond the scope of the Ruling. The Tax Office is considering this comment.

To the extent that Belmont Finance discusses the purchase of an asset by a company that it does not genuinely need or want in order to provide the vendor with funds being financial assistance, the case is now discussed at paragraph 183. It is more relevant at this point in the Ruling where the discussion concerns the acquisition of an asset by the SMSF in circumstances that do not reflect a usual or normal commercial arrangement.

...under the arrangement or transaction an amount is paid by the SMSF, and later repaid to the SMSF, in amounts or in a manner that may be equated in a commercial sense with the repayment of a loan with interest
(paragraphs 14 and 121, 5th bullet point)

The Ruling explains that financial assistance is given to a member or relative of a member if the member or relative is: a partner in a partnership that is financially assisted (as a partnership is generally not a separate legal entity from its partners); or the sole trader that is financially assisted.

However, if the partnership has been incorporated with legal personality separate from that of the partners, it is necessary to consider whether there is indirect financial assistance to a member or a relative of a member.

•

Example 8 (paragraphs 131 to 133) illustrates an indemnity given using the resources of an SMSF for the benefit of a member or relative of a member.

•

Example 10 (paragraphs 153 to 158) illustrates an arrangement where the member of an SMSF uses the resources of the SMSF to liquidate shares held by the member, which were somewhat illiquid, in order to finance the member's business venture.

•

Example 20 (paragraphs 196 to 200) illustrates a loan from an SMSF to a company and subsequently a loan from the company to its member shareholders.

•

Example 21 (paragraphs 201 to 204) illustrates a gift from an SMSF to a discretionary trust which the trust then distributes to beneficiaries who are SMSF members.

•

Example 22 (paragraphs 205 to 207) illustrates an SMSF investing in a business so that SMSF members can access goods at cost price.

•

Example 23 (paragraphs 208 to 210) illustrates an SMSF buying equipment from a company, leasing it back to the company and the company lending the proceeds of sale to its member shareholders.

Example 6, paragraphs 105 and 106; Example 7, paragraphs 107 and 108; Example 8, paragraphs 109 and 110

The view concerning guarantees and charges is now comprehensively illustrated by Example 7 (paragraphs 126 to 129), which replaces Example 5 of SMSFR 2007/D2 (paragraphs 103 and 105).

Example 10, paragraphs 118 and 119 - now Example 6

Example 11, paragraphs 133 to 135 - now Example 9

Example 9 (paragraphs 149 to 152) has been adjusted to reflect a planned arrangement.