Superannuation Technical minutes, December 2011

Meeting details

Venue:	ATO National Office Canberra
Date:	8 December 2011
Start:	2.00pm	Finish:	4.40pm
Chair:	David Schabe
Contact and Secretariat:	Linda Ngo	Contact phone:	(02) 9374 8857

Attendees

Reece Agland	Institute of Public Accountants
Andrew Allan	ATO
Tania Bellina	ATO
Peter Burgess	SMSF Professional Association of Australia Limited
Fabian Bussoletti	Financial Planning Association of Australia Limited
Damian Byrnes	ATO
Michael Davison	CPA Australia
Bob Duncan	Association of Taxation and Management Accountants
Stuart Forsyth	ATO
Andrew Gardiner	National Tax and Accountants Association
Heather Gray	Law Council of Australia (Superannuation Division)
Peter Hawkins	ATO
Meg Heffron	SMSF Professional Association of Australia Limited
Fiona Galbraith (substitute)	Association of Super Funds Australia
Merrie Hennessy	Australian Prudential Regulation Authority
Robert Jeremiah	Small Independent Superannuation Funds Association
Garry Keevers	ATO
Andrew Lee	ATO
Marita McLaren	ATO
Nigel Murray	Treasury
John Morgan (substitute)	Law Council of Australia (Taxation Division)
Linda Ngo	ATO
Michael Perry	Superannuation Aust Pty Ltd
Ian Roberts (substitute)	Australian Bankers Association
David Schabe	ATO
David Shirlow	Financial Services Council
Julie Steed (substitute)	Association of Super Funds Australia
Gabrielle Teys	The Tax Institute
Richard Webb (substitute)	Australian Institute of Superannuation Trustees
Liz Westover	The Institute of Chartered Accountants of Australia

Apologies

Jennifer Batrouney SC	Law Council of Australia (Taxation Division)
Andrew Boal	Institute of Actuaries of Australia
Blake Briggs	Financial Services Council
John Dow	Australian Prudential Regulation Authority
Gus Gilkeson	Australian Bankers Association
Julie Johannsen	Australian Securities and Investment Commission
Tony Keir	Association of Super Funds Australia
Peter O'Reilly	ATO
Brett Peterson	ATO
Brian Stevenson	Association of Taxation and Management Accountants

^[H2]Agenda items

Disclaimer

NTLG Superannuation Technical Sub-group agendas, minutes and related papers are not binding on the Australian Taxation Office (ATO) or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

Open and introductions

The chair (David Schabe) opened the meeting and welcomed everyone to the December meeting.

New representatives Richard Webb (AIST) and Fiona Galbraith (ASFA) were introduced and welcomed to the forum.

Previous minutes

The minutes for the 13 September 2011 meeting were confirmed.

Status of action items

Action item update

Reference	NTLGSPR 130911/01
Action item	Taxpayer Alert TA 2010/2
Responsibility	The ATO to provide further update to members on the status of Taxpayer Alert TA 2010/2.
Outcome	Taxpayer Alert TA 2010/2 was withdrawn on 29 November 2011. All members were sent an email notifying them of its withdrawal. The email provided a link to the withdrawal notice and an ATO fact sheet.

Meeting discussion

The ATO gave an update on the status of TA 2010/2. Members had previously been advised by email of the withdrawal of this Taxpayer Alert (withdrawn on 29 November 2011).

One member suggested that the fact sheet 'Fund rules intended to prevent excess contributions tax' needs to provide practical guidance that explains when the Commissioner will consider an amount that cannot be accepted as a contribution is intermingled with fund assets. He asked, for example, if the relevant amount had been deposited in a fund's bank account, was that a definitive indicator that the amount had been intermingled with fund assets.

However, the LCA representatives suggested that certain statements and principles outlined in the fact sheet which pertains to the abovementioned issue are wrong at law. They suggested that intermingling with fund assets should not be regarded as being of primary significance.

The ATO noted to members that, whilst there are administration issues in having separate trusts, there are also trust asset tracing issues were it accepted that amounts not forming part of the super fund can be intermingled with the money or assets of that fund.

The Treasury representative stated that whether or not the LCA view was correct, the Government has indicated that it has policy concerns about how trustees use the relevant clauses. It has therefore announced its intention to amend the law (as contained in the recently released MYEFO 2011-2012 Report).

The chair invited the LCA and other members to make written submissions to the ATO on the legal principles underlying the aforementioned fact sheet.

Post meeting update

The LCA provided written submissions on the fact sheet 'Fund rules intended to prevent excess contributions tax'. The ATO is in the process of considering these submissions.

Update on recently published and withdrawn rulings, practice statements and ATO IDs

The following update of recently published and withdrawn Rulings, Practice Statements and ATOIDs was tabled with the Agenda.

Public Rulings and Determinations

Ruling topic	Income tax: when a superannuation income stream commences and ceases
ID number	3189
Draft ref number	TR 2011/D3
Issued	13 July 2011
Planned final date	26 April 2012
Ruling topic	Self Managed Superannuation Funds: limited recourse borrowing arrangements
ID number	3520
Draft Ref number	SMSFR 2011/D1
Issued	14 September 2011
Planned final date	16 May 2012
Ruling topic	Income Tax: deductibility of premiums paid by a complying superannuation fund in respect of Total Permanent Disability insurance cover for its members.
ID number	3310
Draft Ref number	TR 2011/D6
Publication date	7 December 2011. This was originally issued as Draft Ruling TR 2010/D9 (published 15 December 2010), which was subsequently withdrawn. The new Draft Ruling covers recent legislative amendments to this area of the law (Tax Laws Amendment (2011 Measures No. 4) Act 2011 (No. 43 of 2011)). The due date for comments on the Draft Ruling is 3 February 2012.
Ruling topic	Miscellaneous Tax: excess contributions tax: when a contribution can be returned
ID number	3363
Draft Ref number	No draft
Planned draft date	Ruling topic withdrawn 13 September 2011. Three topics were to be covered by this draft ruling. One topic may be progressed as a separate self managed superannuation fund regulatory ruling depending on ATO priorities. Another issue was expected to be the subject of litigation to clarity the operation of the law. The relevant matter has been discontinued. The third matter concerned the return of contributions under rules of a fund intended to prevent excess contributions. The ATO published a fact sheet on that topic on 29 November 2011.
Ruling topic	Addendum to TR 2006/7 : Income tax: special income derived by a complying superannuation fund, a complying approved deposit fund or a pooled superannuation trust in relation to the year of income
ID number	N/A
Draft Ref number	No Draft
Publication date	7 December 2011

Practice Statements

Product	PS LA 2011/28 (previously published as draft PS LA 3461)
Title/subject	Superannuation guarantee - remission of additional superannuation guarantee charge imposed under subsection 59(1) of the Superannuation Guarantee (Administration) Act 1992. This practice statement provides guidelines to tax officers for the remission, in whole or part, of the additional superannuation guarantee charge imposed under subsection 59(1) of the Act.
Date published	15 September 2011
Product	PS LA 3550 (draft)
Title/subject	Administration of penalties for making false or misleading statements that do not result in shortfall amounts. This practice statement explains the circumstances in which an entity becomes liable to a penalty for making a false or misleading statement which does not result in a shortfall amount, and how the penalty is assessed, including remission.
Date published	24 November 2011. Comments due 27 January 2012.
Product	PS LA 3551 (draft)
Title/subject	Administration of penalties for false or misleading statements that result in shortfall amounts. This practice statement explains the circumstances in which an entity becomes liable to a penalty for making a false or misleading statement which results in a shortfall amount, and how the penalty is assessed, including determining remission.
Date published	24 November 2011. Comments due 27 January 2012.

Published ATO IDs

Product	ATO ID 2011/77
Title/Subject	Payment of death benefit to former stepchild: meaning of 'child' and 'dependant'
Date Published	21 October 2011
Product	ATO ID 2011/80
Title/subject	Unclaimed money: no contact between fund and member
Date published	21 October 2011
Product	ATO ID 2011/81
Title/subject	Self managed superannuation funds: meaning of 'give a charge' under regulation 13.14 of the Superannuation Industry (Supervision) Regulations 1994
Date published	21 October 2011
Product	ATO ID 2011/83
Title/subject	Superannuation: death benefits dependant - former spouse - same sex relationship
Date published	21 October 2011
Product	ATO ID 2011/84
Title/subject	Self managed superannuation funds: scheme to avoid the prohibition on acquiring assets from related parties
Date published	28 October 2011
Product	ATO ID 2011/87
Title/subject	Superannuation Guarantee Charge: employment status of a medical practitioner operating from a medical clinic
Date published	28 October 2011

Withdrawn rulings

Nil

Withdrawn ATO IDs

Nil

Meeting discussion

The ATO confirmed that Draft Ruling TR 2011/D3, will be presented to the Rulings Panel in March 2012, and the Final Ruling is scheduled for publication as a final on 26 April 2012.

In relation to Draft SMSFR 2011/D1 on limited recourse borrowing arrangements, a member mentioned two related questions on re-mortgaging raised through the Professional to Professional process. The ATO confirmed receipt of these questions and that the issues raised are currently being considered. SMSFR 2011/D1 is also expected to be presented to the Rulings Panel in March 2012, with a planned publication date of 16 May 2012.

The chair announced to members the publication of Draft Ruling TR 2011/D6 on 7 December 2011. The ATO noted for the attention of members Example 9 of the Draft Ruling and underlined to members that in circumstances where there is no connection between the occurrence of an insured event under the insurance policy and the fund's current or contingent liability to provide benefits referred to in section 295-460 of the ITAA 1997 for its members, the premium paid for the insurance policy is not deductible under section 295-465 of the ITAA 1997.

The chair also noted the publication of an Addendum to TR 2006/7 on special (non-arm's length) income. The Addendum amends TR 2006/7 to reflect the decision of the Full Federal Court in Darrelen Pty Ltd, Trustee of the Henfam Superannuation Fund v FCT [2010] FCAFC 35, and to note that the Ruling still applies following the repeal of section 273 of the Income Tax Assessment Act 1936 to the extent that section 295-550 of the Income Tax Assessment Act 1997 expresses the same ideas.

Note : A member also raised an issue relating to PS LA 3550 (draft) during the discussion for agenda item 10 - Other business. For further details, refer to the notes for that item.

'Top 3' items of significance

This is a standing agenda item to enable consultation with members on what are agreed as the highest priority issues.

From the feedback received at the September 2011 meeting, it was determined that the following should be considered the 'Top 3' items of significance from the NTLG Superannuation Technical Sub-group:

Item 1	Item 2	Item 3
Taxation and regulatory consequences of TR 2011/D3 (including ECPI)	Taxation and regulatory consequences of death benefits (including ECPI)	Successor fund transfers

Meeting discussion

One member suggested that the extent to which a deduction notice is valid if given after a rollover of part of a member's benefits may be a potential 'Top 3' item (possibly at the expense of successor fund transfers).

The ATO indicated that it had set out its interpretation of the law in relation to that issue in Taxation Ruling TR 2010/1. The ATO stated it had discussed the possibility of having the issue litigated with representatives of the relevant body. The ATO had suggested that might be achieved by using the relevant review rights relating to a private ruling. The ATO indicated that it does not intend to do more in the absence of a request for such a ruling.

Another member noted that submissions had been made to Treasury on the matter. Treasury confirmed the matter had been considered but was not able to provide any further update.

Several members spoke in support of retaining successor fund transfers in the top three issues. However, it was mentioned that a further extension of the loss transfer relief would ensure there was continued rationalisation and mergers of superannuation funds.

One member stated that, in the absence of any statement of view from the ATO about successor fund transfers, funds were still relying on the advice provided under Assistant Deputy Commissioner Brett Peterson's signature, to the Superannuation Consultative Committee and the Superannuation Technical Sub-group of the NTLG. The ATO confirmed the advice still applies.

The consensus amongst all members at the meeting was that the 'Top 3' items identified at the last sub-group meeting are still current and should remain as is.

Another member also raised a query on the progress of a number of issues previously raised in relation to exempt current pension income (ECPI) and segregation. The ATO advised that analysis of those issues is continuing, but noted that some are of a practical/administrative nature, rather than of a technical nature which are typically considered in this forum. However, the ATO also indicated that the relevant areas of the Tax Office will progress the consideration of some of these practical/administrative issues.

Litigation update

Period from 19 August 2011 to 30 November 2011

Since the last NTLG meeting was held, the following decisions were handed down.

Roy Morgan Research Pty Ltd v Commissioner of Taxation [2011] HCA 35

Issue:

The appeal concerned the power of the Parliament to make laws with respect to taxation under paragraph 51(ii) of the Constitution. The taxpayer challenged the validity of the provisions in the Superannuation Guarantee Charge Act 1992 (the Charge Act) and the Superannuation Guarantee Administration Act 1992 (the Administration Act).

Outcome:

The High Court held unanimously that the Superannuation Guarantee Charge (SGC) was a tax, and that the taxpayer's constitutional challenge to the Administration Act and the Charge Act failed. The receipt of the proceeds of the SGC into the Consolidated Revenue Fund (CRF) established that the SGC was imposed for 'public purposes'. The Court held that where other necessary constitutional criteria of a tax are met, as they were in this case, the receipt of funds into the CRF conclusively established the character of the SGC as a valid tax.

Allen (Trustee), in the matter of Allen's Asphalt Staff Superannuation Fund v Commissioner of Taxation [2011] FCAFC 118 (7 September 2011)

Issue:

The case concerns the operation of the special income rules in section 273 of the Income Tax Assessment Act 1936 (since replaced by the non-arm's length income rules in section 295-550 of the Income Tax Assessment Act 1997).

The taxpayers are the trustees of a self-managed superannuation fund (SMSF). For the year ended 30 June 2003, a related fixed trust distributed a $2.5 million capital gain to the SMSF, which had previously been distributed by a hybrid trust to the fixed trust.

Outcome:

The Full Court upheld that 'income derived' within the meaning of former subsection 273(7) refers to both statutory income (for example, capital gains) and income according to ordinary concepts. For the purposes of subsection 273(7), the Full Court considered that the SMSF could 'acquire' a fixed entitlement to income notwithstanding that it was a passive recipient of that entitlement.

However, the Full Court allowed the taxpayer's appeal against the penalty assessment after ruling that the taxpayer's position was 'reasonably arguable' pursuant to section 284-75 of Schedule 1 to the Taxation Administration Act 1953.

Note : Allen's Asphalt have sought leave to appeal to the High Court.

Olesen v Parker [2011] FCA 1096

Issue:

Civil penalty case involving contraventions by Mr and Mrs Parker in relation to sections 62, 84 and 109 of the Superannuation Industry (Supervision) Act 1993.

Outcome:

Gordon J ordered a monetary penalty of $35,000 be imposed on the First Respondent, and a monetary penalty of $15,000 be imposed on the Second Respondent.

Gordon J noted that 'Neither the assessments issued, nor the notice of non compliance issued under section 40 of the Act, were punitive or intended to fulfil the functions of monetary penalties imposed under s 196 of the Act … Each action is intended to achieve and does achieve different objectives.'

Hardy and Commissioner of Taxation [2011] AATA 685

Note : this favourable decision was in the Small Tax Claims Tribunal

Issue:

Whether the assessments of superannuation contributions surcharge issued to the Applicant on 15 February 2011 were correct.

Outcome:

Senior Member Fice held that:

The Commissioner was correct in amending the Applicant's assessable income for the 2004 year to include the reportable fringe benefit in the amount of $11,142, for the purposes of calculating his adjusted taxable income under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (SCT Act), pursuant to subsection 7A(3) of the SCT Act.

The Commissioner correctly determined, in accordance with subsection 10(3) of the SCT Act that Mercer Super Trust was not liable to pay the superannuation contributions surcharge because it had ceased to hold the Applicant's contributions at the time that the Commissioner issued the assessment to Mercer Super Trust in February 2007.

The Commissioner correctly determined, in accordance with subsection 10(3) of the SCT Act that Summit Master Trust was only liable to pay the superannuation contributions surcharge in relation to the sum of $304.46 of contributions which it still held in respect of the Applicant's contributions for the 2004 year.

The Commissioner's assessment issued to the Applicant in respect of the payments made to him from Summit Master Trust by way of ETP and a split in surchargeable contributions due to his divorce settlement, correctly resulted in a liability to the Applicant to pay the superannuation contributions surcharge in accordance with subsection 10(4) and section 10A of the SCT Act, respectively.

The Commissioner correctly calculated the applicable rate of superannuation contributions surcharge in accordance with section 5 of the Superannuation Contributions Tax Imposition Act 1997.

DB Mahaffy and Associates Pty Ltd and Commissioner of Taxation [2011] AATA 796

Issues:

The issues before the Tribunal were:

whether the assessments of SGC and penalty assessments issued by the Commissioner in relation to the Applicant company for the quarters ended 31 March 2004, 30 June 2004, 30 September 2004, 31 March 2005, 30 June 2005 and 30 September 2005 are excessive; and

whether the Tribunal will exercise its discretion pursuant to subsection 62(3) of the Superannuation Guarantee Administration Act 1992 to remit the Part 7 penalties imposed on the Applicant for the quarters ended 31 March 2004, 30 June 2004, 30 September 2004, 31 March 2005, 30 June 2005 and 30 September 2005.

Outcome:

Senior Member Ettinger confirmed the Commissioner's assessments and declined to exercise the Tribunal's discretion in relation to the Part 7 penalties.

Rinaldo v Commissioner of Taxation [2011] AATA 839

Issue:

Whether the excess contributions tax assessment raised against Mr Rinaldo for exceeding his non-concessional contributions cap by $150,000 in the 2007 income year was correct.

Outcome:

The AAT member, Dr Hughes, found that there was sufficient evidence to conclude that the $700,000 payment was intended as a contribution made solely in respect of the Applicant.

In forming this conclusion, the AAT made reference to cases such as Player v Commissioner of Taxation [2011] FCA 869 in concluding that the fact that a payment is subsequently characterised in a different way is not conclusive of its true character, except so far as it is evidence of the taxpayer's intent at the time of payment. The Tribunal also found that while the Applicant was motivated to maximise his non-concessional contributions without exceeding the caps, his objective purpose was to allocate the $700,000 solely to his member account. The fact that he failed to achieve this goal was not as a result of a clerical error or a misconception as to an existing obligation but rather the result of a misunderstanding as to the consequences of his conscious act. The Applicant's mistake (or that of his tax agent if that is what it was) could not be rectified retrospectively.

Meeting discussion

On the Rinaldo decision, the ATO noted that this is another in a series of excess contributions tax (ECT)-related matters where the reporting and characterisation of contributions made to the relevant fund has been the primary issue in contention.

A member asked for an update on the status of an appeal in the Federal Court regarding excess non-concessional contributions, in which restitution for mistaken payment was an issue to be considered. The ATO confirmed that the matter has been resolved between the parties prior to hearing and the appeal has been withdrawn. The ATO also noted that in another matter the NSW Supreme Court is again expected to consider issues arising from mistaken contributions. The matter would consider similar issues to those in Personalised Transport Services Pty Ltd v. AMP Superannuation Limited & Anor [2006] NSWSC 5 which concerned the principles of unjust enrichment and the equitable remedy of restitution as they apply to the trustees of superannuation funds.

Technical questions raised by members

Related party builders and section 66 of the Superannuation Industry (Supervision) Act 1993

Issues raised

Will the trustees of a SMSF breach section 66 of the SIS Act if the trustees appoint as their agent, a related party to purchase the goods and materials on behalf of the trustee and those goods and material are used in the construction of a building on land owned by the SMSF?

Will the trustees of a SMSF breach section 66 of the SIS Act if the trustees execute a deed of bare trust and transfer funds from the SMSF to the bare trust to finance the purchase of goods and materials used by a related party in the construction of a building on land owned by the SMSF?

Background information provided by member

The construction of a building requires the performance of a service (in this case by a related party) and the use of goods and materials to construct the premises. As part of the professional services provided by a builder, it is common practice for builders to provide the goods and materials necessary to construct the premise. It would be unusual, and in most cases impractical, for the consumer (in this case the SMSF) to purchase the goods and materials required to construct the premise directly from the supplier. In deed, given trade discounts, it would be to financial disadvantage of the SMSF if it did purchase goods and materials directly.

Paragraphs 17 to 19 of SMSFR 2010/1, state:

'In analysing whether there has been an acquisition of an asset by a trustee or investment manager, and the nature of that asset, the Commissioner takes a holistic approach to determine the substance of the transaction.'

'If a trustee or investment manager enters into a contract with a related party entitling the SMSF to the performance of a service by the related party, the performance of that service is the substance of the transaction and not any rights that the SMSF might also acquire to have that service performed. Therefore, the acquisition of the performance of a service does not contravene subsection 66(1)'

'If goods or materials that are insignificant in value and function are provided to an SMSF as part of a service it is the Commissioner's view that it remains the performance of a service only. If, however, goods or materials are provided to the SMSF that are not insignificant in value and function there is an acquisition of assets (being the goods or materials).'

At the December 2010 NTLG Superannuation Technical Sub-Group meeting, the ATO confirmed this view and said in cases where an SMSF engages a related party to construct a building on land owned by the SMSF, it must be clear that the related party is only providing building services and not any materials used if a breach of section 66 is to be avoided.

During the meeting a question was asked about agents and whether the supply of goods and materials by a related party agent appointed by the trustees, would avoid a breach of section 66. The chair invited the industry to submit this question to the ATO.

The appointment of an agent in this scenario would typically involve the SMSF trustees appointing the related entity as their agent under a deed of agency agreement, or by a variation to the building contract.

The deed of agency agreement would confer upon the agent the terms of the agency and would authorise the related party to acquire the goods and materials as an agent on behalf of the trustees. Alternatively, the agency appointment, and the authority to act conferred upon the agent, could be expressed or implied in the building contract.

The agent would acquire the goods and materials and then invoice the trustees for the cost of the purchase either on a progressive payment basis or only once the work has been completed. The cost of services provided may be invoiced separately or together with the costs of the goods and materials. The invoiced cost of the goods and materials may be increased by a profit margin charged by the related party builder.

As an alternative, a new bank account could be opened in the name of the builder and the builder executes a deed of bare trust confirming that it holds the bank account on bare trust for the SMSF trustee and that all things purchased with the bank account proceeds belong to the SMSF. Funds are then transferred from the SMSF to the bank account and neither the builder nor any other entity puts any money in the bank account. The builder buys building supplies from the bank account as directed by the SMSF trustee and those supplies are then affixed to the SMSF land.

Industry view/suggested treatment provided by member

The law of agency is well established. Under the agency contract, the agent is given the authority to do certain things on behalf of the principal. The principal is bound provided the agent acts within actual or ostensible authority. An agent can provide a purchasing service and order goods and materials from a third party on behalf of their principal so long as the purchase is made within the scope of the agent's authority and it is within the power of the principal to make the purchase itself. In such instance, the principal must pay for the goods because they are effectively bound through the agent in a contract with the third party. The agent, on the other hand, is not liable under the purchase contract.

As the agent is not liable under the purchase contract to acquire the goods and materials, there has been no acquisition of the goods and materials by the agent (the related party builder). Instead the goods and materials have been acquired by the SMSF trustees as the SMSF trustees (and not the related party builder) are contractually bound to acquire the goods and materials under the purchase contract. Paragraph 14 of SMSFR 2010/1 states:

'An asset is acquired whether it is an asset that exists prior to its transfer or assignment to the SMSF or it is an asset (for example, rights under a contract) that upon its creation is acquired by the trustee or investment manager.'

Therefore, the trustees of a SMSF will not breach section 66 of the SIS Act if the trustees appoint as their agent, a related party to supply a purchasing service being a service to purchase goods and materials on behalf of the trustee used in the construction of a building on land owned by the SMSF.

Similarly, the principles of bare trusts are well established.

[The member's organisation] notes that many APRA regulated funds use bare trustees or custodians to be the registered owners of their assets. It is well accepted these arrangements are 'looked through' for the purposes of s 66 as well as the in-house asset rules.

Although the builder's name is on the bank account, it is holding that money on trust for the trustee of the SMSF. Consistent with the High Court's description of bare trusts in CGU Insurance Limited v One.Tel Limited (in liq) (2010) 268 ALR 439 [36], the bare trustee (that is, the related party builder) has no active duties to perform other than those which exist by reason of the office of trustee, with the result that the money awaits disposition at the direction of the SMSF trustee. The SMSF trustee directs the bare trustee to release the funds to the agent to acquire the relevant goods and materials. Because the goods and materials are purchased with the SMSF's moneys, the goods and materials would always belong to the SMSF. Accordingly, because the goods and materials already belong to the SMSF, there is no acquisition when the bare trustee releases the money to the agent in exchange for the goods or materials as directed.

This treatment would be consistent with GSTR 2008/3. It would also be consistent with prior ATO comments in respect of a SMSF borrowing that the transfer of an acquirable asset from the holding trustee to the SMSF trustee does not breach section 66.

Technical reference

Subsection 66(1) of the SIS Act

SMSFR 2010/1

Impact on clients suggested by member

High, if the views in draft SMSF ruling SMSFR 2011/D1 prevail (that is, if assets acquired under a limited recourse borrowing arrangement are permitted to be improved). Also high for SMSF clients who hold vacant or underdeveloped land in their fund.

Priority of issue where ATO view is required suggested by member

Medium

ATO initial response

Question 1

Section 66 of SISA prohibits, with some exceptions, the acquisition of assets by the trustee of an SMSF from a related party of the SMSF. Consequently, if a related party builder acquires materials in their own right which are then supplied to the SMSF, this would result in a contravention of section 66.

Alternatively, where a related party only acts as an agent, arranging for the acquisition of building materials on behalf of the SMSF trustee from an unrelated vendor, and the related party at no times holds legal title to the building materials, the SMSF trustees have acquired the materials from that vendor, not the related party. Therefore, section 66 of SISA would not apply to the acquisitions.

Whether the particular arrangements under which building materials are supplied do amount to a direct acquisition by the SMSF trustee from the original suppliers, with the related party only acting as an agent, will be determined by the application of the normal laws of contract and agency to the facts of each case.

As stated in the industry suggested treatment, where there is a direct acquisition by the SMSF trustee from the original supplier it is the SMSF trustee who has the contractual obligation to pay the original supplier for those materials.

If the related party pays for building materials and invoices the SMSF either progressively (that is, at regular intervals) or at the end of the project, especially where a mark-up or profit is added, this might be indicative of the purchase of the materials by the related party in their own right and on-sale to the SMSF trustee rather than a purchase by the SMSF trustee through the related party as agent. If the related party builder claims GST input tax credits in respect of the acquisition of the building materials, this might also be indicative that the related party builder acquired the building materials as part of their business operations and then supplied these to the SMSF trustee.

In addition, if the agent has outlaid funds to acquire the materials on behalf of the SMSF, an arrangement to defer reimbursement of that amount may amount to a borrowing by the trustee in contravention of section 67 of the SISA. This is discussed in paragraphs 70 to 74 of SMSFR 2009/2: Self Managed Superannuation Funds: The meaning of 'borrow money' or 'maintain an existing borrowing of money' for the purposes of section 67 of the Superannuation Industry (Supervision) Act 1993.

Question 2

The ATO does not believe that payment for the building materials out of a bank account which is held by the related party on bare trust for the SMSF will, of itself, cause a contravention of section 66 in respect of the acquisition of those building materials. As discussed in question 1 above, the application of section 66 will depend on whether the building materials are acquired by the SMSF trustee from the original suppliers, with the related party only acting as an agent, or whether the related party acquires the building materials in their own right which are then supplied to the SMSF trustee.

The ATO would be interested to discuss the commercial rationale for the use of a bank account held by the related party on bare trust for the SMSF trustee.

Meeting discussion

The member who raised this issue gave a background overview of the issue, which is related to a question discussed at the December 2010 meeting of this sub-group.

A member noted that the industry view provided in the question referred to the look through of bare trusts and that the ATO initial response did not raise this. The member queried if this was because the ATO accepted the view that bare trusts and custodian trusts are looked through. The ATO noted that in the second question only the bank account was held on bare trust by the related party and therefore the question was answered on the basis that the related party was still only acting as an agent for the superannuation fund in respect of the acquisition of the building materials. As this would result in the superannuation fund acquiring the building materials directly from the unrelated vendor, the ATO did not consider that it was necessary to consider the treatment of such assets held on trust.

A member noted that the ATO had not yet published a position in relation to the use of bare trustees or custodians as the registered owners of assets of a superannuation fund, and whether these arrangements will be looked through for SIS regulatory purposes. The ATO explained that this was still being considered and also noted that work is being undertaken within the Tax Office to examine this area of the law in respect of income tax. It was agreed amongst members that a confirmed ATO view on this issue will be required.

No other questions were raised by members.

Update on FSC submission on death benefits

Discussion of the issues paper on death benefits circulated to the membership prior to the meeting. The paper was drafted to facilitate discussion of a number of issues raised in the FSC submission on death benefits.

Meeting discussion

The ATO outlined the purpose of the issues paper on death benefits circulated to the membership. It was stated that whilst TR 2011/D3 contains some discussion relating to a number of the issues raised in the paper, it does not contain in-depth analysis of those issues.

It was acknowledged by the ATO and all members at the meeting that more time will be required for the membership to fully consider the issues and questions raised in the paper. The ATO made the point in discussion that it was seeking written, reasoned responses from the membership on the issues and questions raised in the paper. It was considered, given other workloads, that members would need until at least March 2012 to provide such written responses.

It was agreed by members at the meeting that the questions raised in the issues paper are key to the resolution of the technical issues concerning superannuation death benefits. A member noted that proper resolution of some issues may only be secured by legislative change. The ATO confirmed it was happy to receive individual or joint responses from members.

One member commended to the membership a paper written by John Edstein on the accrual of benefits which contains an analysis of the nature of a member's interest in a superannuation fund.

Post meeting update

The member provided a copy of the paper Accrued Benefits: Revisited by John Edstein, Partner, Mallesons Stephen Jaques from February 2009. The paper has been circulated to all members.

Annual forum review

Conduct of annual forum review. Provide members with the opportunity to have an overview discussion in relation to the organisation, achievements, and forward focus of the sub-group. A survey was circulated to members with the meeting agenda.

Meeting discussion

The chair invited comments from members in relation to the four focus areas outlined in the survey. Clear purpose, strong and fair leadership, engaged and focussed members, and governance. Below is a summary of comments from the members of the group.

Members are in general agreement that the sub-group functions very well and adds technical value to the understanding and administration of superannuation and related tax laws. The consensus is that this is a well-organised and effective technical forum, and that the interactions between the ATO, other government representatives, and industry members are on the whole found to be mutually satisfying for all parties.

It was observed by one member that consultative forums are important in working through technical issues and the underlying legislative framework.

A member described this sub-group as one of the best technical forums she is involved in. There was overall praise from the members on the quality and robustness of the technical discussions taking place at these meetings.

Focus groups/discussion and/or meetings on specific topics are very useful, and in many instances assist in progressing the issue(s) under discussion. The workshop on limited recourse borrowing arrangements was cited as an example of this. The withdrawal of TA 2010/2 and related law change, as well as resolution of technical issues raised in this forum through TIES, were cited as further examples of discussion at these meetings being the basis for the technical analysis which led to the clarification of the relevant areas of the law.

Members find this forum is very effective in answering specific technical questions on various areas of the superannuation laws. It was also observed by members that discussion at this forum leads to the effective resolution of many discrete technical issues.

The members advised the chair that the current frequency and mode of meetings (face-to-face) is at an effective level and should be retained. Members agreed that face-to-face meetings create and foster a more collaborative and consultative approach to resolving technical issues, and ensure high levels of engagement within the membership.

Members also advised that alignment with the SCC meetings is important, especially where face-to-face meetings are scheduled, as there are significant cross-overs in membership, and this assists in travel budget pressures. On that basis, the members also indicated they preferred to retain quarterly meetings.

The chair and ATO acknowledged and thanked members for their contribution in attending and participating in discussions at these meetings, and noted that all efforts are made to fully resolve and respond to all issues raised in this forum (as well as updating the membership of the progress of such issues as they are being considered).

Members suggested the following ideas for potential improvement to the sub-group's current processes:

Consideration be given to introducing a method (aside from raising formal action items) of tracking the progress of questions/issues raised at meetings through the compilation of a register of such questions/issues, with a view to updating the membership of such progress at future meetings.

Exploration of possible options for the membership to engage on policy debates.

The chair thanked members for their comments and invited members to provide further comments, if they wished to, in writing via the survey attached to the agenda for this meeting.

Other business / close of meeting

Meeting discussion

Tax Issues Entry Systems (TIES)

The chair updated the members on the progress of TIES issue reference number 0017/2010, previously raised through this sub-group. A resolution to the issue has been included in Tax Laws Amendment (2011 Measures No. 9) Bill 2011, which was introduced to parliament on 23 November 2011.

ABR - systems issue

A member raised a general issue (not specific to superannuation) regarding the reliability of information recorded on the Australian Business Register (ABR), which is used by the ATO as part of the decision making process in matters relating to the wind-up of funds and companies. The ATO noted the issue raised and will forward the matter to the relevant area(s) of the Tax Office for further consideration.

PS LA 3550 (draft)

A member raised an enquiry relating to PS LA 3550 (draft) (which was mentioned in the list of recently published and withdrawn rulings, practice statements and ATO IDs at agenda item 4). The concern raised related to errors made on member contributions statements (MCS) and the potential problem(s) facing administrators of superannuation funds in addressing these errors as they are not able to change the characterisation of the contribution reported unless the mistake is confirmed.

The ATO acknowledged awareness of reporting issues from the taxpayer/superannuation fund's end, and noted the related impact this has on a number of ECT litigation matters, but also observed that there are as yet no clear resolutions to this emerging risk.

Phoenix companies - directors' liability

A member enquired on the status of the issue of directors' liability in relation to Phoenix companies. The Treasury representative responded that the government is currently considering the issue.

^[H14]Next meeting

The next meeting is scheduled for 6 March 2012.

The chair invited submissions for agenda items from members for the March meeting. The due date for submissions for that meeting is 20 January 2012.

Meeting closed.