ATO Interpretative Decision
ATO ID 2006/335
Superannuation
Self managed superannuation funds: in-house assets - contractual funding arrangement with related partyFOI status: may be released
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will a self managed superannuation fund (SMSF) have an 'in-house asset' under section 71 of the Superannuation Industry (Supervision) Act 1993 (SISA), where the SMSF makes contributions to a related party under a contractual arrangement which funds the acquisition of an asset by the related party, and provides the SMSF with the right to receive payments as a return on the contributions made?
Decision
Yes. When an SMSF makes a funding contribution in exchange for contractually enforceable rights to receive payments from the related party, it has invested in a related party for the purposes of subsection 71(1) of the SISA.
Facts
Under a contract, an SMSF has contributed money towards the acquisition cost of an asset that is or has been acquired by the other party to the contract. The other party is a related party of the SMSF under subsection 10(1) of the SISA.
The contract stipulates that the related party controls and manages the asset and is entitled to all receipts from the asset. The contract also states that the SMSF shall not be required to guarantee or indemnify the repayment of any borrowings or other obligations of the related party.
The SMSF is entitled to receive payments from the related party under the contract. The amount of the payments is calculated as a proportion of the proceeds from sale, lease or other use of the asset. The relevant proportion relates the quantum of contributions made by the SMSF to the acquisition cost of the asset. The contract states that the SMSF acquires no legal, equitable or other interest in the asset.
The contributions of the SMSF are stated by the contract not to constitute a loan or to otherwise give rise to an obligation to repay an amount to the SMSF. The SMSF's pecuniary interest in the arrangement is limited to its entitlement to receive the contractual payments from the related party.
Reasons for Decision
An 'in-house asset' is defined in section 71 of the SISA as:
...an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund...
Subsection 10(1) of the SISA defines 'invest' to mean:
- (a)
- apply assets in any way; or
- (b)
- make a contract
- for the purpose of gaining interest, income, profit or gain.
Subsection 10(1) defines asset to mean:
any form of property and, to avoid doubt, includes money (whether Australian currency or currency of another country).
The SMSF has made an investment. Money has been laid out in the acquisition of some species of property from which profit or interest is expected (Re Wragg, Wragg v. Palmer [1919] 2 Ch 58 at 64-65; Inland Revenue Commissioners v. Rolls-Royce Limited [1944] 2 All ER 340 at 341-342).
The investment is in a related party for the purposes of subsection 71(1) of the SISA as the investment confers an interest in any property of the related party (Trevisan & Another v. Commissioner of Taxation (1991) 29 FCR 157; 91 ATC 4416; (1991) 21 ATR 1649). The SMSF's contractual rights to payments from the related party, acquired in return for its funding contributions under the arrangement, are a chose in action enforceable against the related party. This chose in action constitutes an enforceable interest in the property of the related party.
As the SMSF has made an investment in a related party under the arrangement, the investment is an in-house asset under subsection 71(1) of the SISA.
Date of decision: 4 December 2006Year of income: 30 June 2006
Legislative References:
Superannuation Industry (Supervision) Act 1993
section 71
subsection 10(1)
Case References:
Re Wragg, Wragg v. Palmer
[1919] 2 Ch 58
[1944] 2 All ER 340 Trevisan & Another v. Commissioner of Taxation
(1991) 29 FCR 157
91 ATC 4416
Keywords
Retirement income entities
Self managed superannuation funds
SMSF investments
Superannuation
Superannuation fund in house assets
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 4 December 2006 | Original statement |
| 14 August 2009 | Archived |
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