The AAT has held that a non-compliance notice should be issued to a self-managed superannuation fund (SMSF) for regulatory breaches in respect of “book entry” loans made via a related party unit trust.
The taxpayer is the corporate trustee of an SMSF and also acts as the trustee of a discretionary trading trust operating a wool processing business. In 1997, the discretionary trust transferred real property to a related unit trust and the SMSF acquired all of the units in the trust. In 2000, the trading trust secured loans from a bank secured against the unit trust’s property. The property was sold in 2004 but the proceeds were used to discharge the debts of the discretionary trust. In simple terms, the major asset of the unit trust was effectively replaced by a loan from the discretionary trust (which was unlikely to be repaid).
The Commissioner issued the trustees with a notice of non-compliance under s 40 of the SIS Act for contravening the regulatory provisions in ss 62 (sole purpose), 67 (prohibition on borrowing) and 109 (arm’s length dealing). After re-affirming this decision, the Commissioner subsequently varied his reasons to rely on breaches of s62, s84 (in-house assets) and s109. The taxpayer argued that there had never been a “loan” from the SMSF to the unit trust as the financial statement merely recorded “book entries” and there had been no distribution and loan back.
The AAT held that the taxpayer had contravened s62 and s84 after concluding that there was a distribution of income to the SMSF and a loan back to the trading trust based on the financial statements (and tax returns) of the SMSF and unit trust. In any event, the AAT said there was a loan in the form of “financial accommodation” under s 10(1). However, the AAT held that the SMSF did not breach s109 as there was no sale or dealing in the units of the trust.
Furthermore, the AAT upheld the Commissioner’s decision not to exercise his discretion under s 42A(5)(b) to treat the fund as a complying fund despite the contraventions.
(AAT Case [2012] AATA 61, Re Montgomery Wools Pty Ltd (as trustee for Montgomery Wools Pty Ltd Super Fund) and FCT, AAT, Ref No 2009/3486, Redfern SM, 6 February 2012.)
[LTN 24, 7/2]