Lessons from the courts for your SMSF

SMSF technical expert and columnist for The Australian newspaper
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During the past 18 months, there have been a number of interesting cases brought before the Courts, which provide good lessons on how you can deal with your financial affairs.

Following is a brief summary of the three most relevant cases for trustees of a self managed superannuation fund.

1. Interhealth Energies

In this case, the trustees of a super fund signed an enforceable undertaking with the Tax Office to correct a number of problems with their fund. One of the problems involved a benefit payment to a member of the super fund but the trustee didn’t have clear title to a property it owned. This meant they couldn’t sell the property and therefore make the benefit payment. The key lesson from this saga is, if your fund gets into trouble and you sign an agreement with the ATO, make sure you can fully carry out the transaction.

2) Shail Super Fund

This is a well-known case and often used as an example of the possible benefits of corporate trustees over individual trustees. Mr Shail illegally took several million dollars from his super fund and transferred it to bank accounts in Turkey. The Tax Office removed the complying status of the super fund and imposed a penalty on the super fund trustees. In total, several million dollars were owed to the ATO. Mr Shail absconded and left his estranged wife, Mrs Shail, to sort out the mess. Although she complained about the penalties, the Administrative Appeals Tribunal found for the ATO.

Key message: insist that all trustees have to authorise payments from super fund bank accounts. If the fund had had a corporate trustee instead of individual trustees, the fund members, as shareholders in the corporate trustee, may have only been liable for the company’s assets.

3) Pamela Dowling

John Dowling withdrew $294,000 out of his super in 2008/09 as a lump sum and contributed this money into his wife’s super fund. The contribution was classed as a non-concessional contribution or NCC.

Before performing this transaction, Mr Dowling received verbal advice from a Centrelink Financial Information Service Officer as well as a financial planner associated with the super fund he was using at the time.

In the 2010/11 financial year, Mrs Dowling withdrew $240,000 from her super account and contributed $200,000 of this amount back into her super fund. She did this to reduce the tax payable on death benefits paid to her non-dependant adult children. She decided on this by reading a newspaper article but didn’t seek any advice.

The 2011 financial year was the last year in Mrs Dowling’s three-year contribution period. Over this period, her total contributions were $494,000 or $44,000 more than the $450,000, which is allowed to be contributed over three financial years.

The Tax Office assessed the $44,000 as an excess NCC and asked for 46.5% tax. Mrs Dowling objected to this and claimed special circumstances. The case ended up in the Administrative Appeals Tribunal (AAT), which found the $294,000 contribution made in 2008/09 shouldn’t be counted as an NCC for excess contributions tax purposes. The result – the excess tax problem disappeared. The Tax Office appealed this case to the Federal Court, which has been heard. Judgement can be expected soon.

Cases such as the above are important because if a similar situation applies to you and your SMSF, you can use the above examples as a guide, and also the determinations as a precedent, if you own case ever goes that far.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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