Three recent judicial decisions show just how foolish some SMSF trustees can be. The key lessons from these cases are:
- If your super fund’s a basket case and you’ve reached a formal agreement with the Tax Office on a way forward, then execute the agreement.
- Don’t take money out of the super system before the super laws allow it as the tax penalties can be severe.
- Don’t be too clever by trying to circumvent the super laws.
These ‘earth shattering’ discoveries come to us courtesy of one recent Federal Court case and two Administrative Appeals Tribunal cases.
Foolish case no. 1
Our first case, Commissioner of Taxation v Interhealth Energies Pty Ltd, was decided in the Federal Court.
A couple had an acrimonious relationship breakdown and since then they have enjoyed many days sitting in various courts having an ongoing legal boxing match.
During happier days, they had set up an SMSF that had invested most of its money in a related unit trust – which they controlled – which in turn had invested all of its funds in another unit trust – which they controlled – which had purchased a property.
For some obscure reason, the property’s title nominated the man as the owner of the property and not the corporate trustee – he had to be dragged kicking and screaming to change this.
Somehow, the man ceased to be a director of the super fund’s corporate trustee and therefore had to leave the super fund. The SMSF’s corporate trustee didn’t pay out his benefit, but did make a formal legally binding agreement with the Australian Tax Office (ATO) that the man’s benefit would be paid out promptly.
After some time of inaction, the ATO instigated the current legal action so the courts could force the trustee to pay the man’s account balance out. Justice Logan told the super fund to do all that it had agreed to do.
However, the case isn’t over. His Honour is still to consider if the fund should be made a non-complying super fund, which would see it hit with various tax penalties.
Foolish case no. 2
Our next case is called Bruce Mason v Commissioner of Taxation, which was decided before the Administrative Appeals Tribunal (AAT).
Mason wanted to loan money to a business colleague and decided the best way to do this was to illegally take two lump sum benefits from his super fund.
The money was withdrawn illegally because, at the time, he didn’t satisfy any rule that allows withdrawals from the super system (he has since retired).
The tax laws allow the ATO to tax these illegal benefit payments at the member’s personal marginal tax rates. This specific law also allows the ATO to waive this penalty if it believes such action is warranted (these rules are about to change, but more on that in another article).
Ultimately, the ATO elected to apply a modest 15% tax to one of Mason’s illegal withdrawals, but not tax the other. The ATO decided not to remove the super fund’s complying status, which would have seen its assets taxed at 46.5%.
Mason thought the ATO was being harsh and made a formal complaint, but the Administrative Appeals Tribunal (AAT) decided the ATO’s approach was reasonable.
The ATO was told about Mason’s breaches by the external auditor of the super fund.
Foolish case no. 3
Our final example, R Ali Super Fund v Commissioner of Taxation, involved a super fund loaning money to a related company, which in turn loaned money to the super fund’s members.
The super laws don’t allow money to be loaned to members or their relatives. In all, about $45,000 – the vast bulk of the R Ali Super Fund’s assets – were involved in the breaches. Astonishingly, the main person involved in these breaches was a registered tax agent.
Given the seriousness of the breaches, the ATO removed the super fund’s complying status for all the years that the loans remained outstanding.
The super fund disagreed with this decision and commenced this AAT case. Unsurprisingly, the AAT found in favour of the ATO.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: Should we sell up now? [1]
- Lance Lai: Chart of the week: accumulate Telstra on the dips [2]
- Rudi Filapek-Vandyck: The broker wrap: only one company rated Buy [3]
- Paul Rickard: How to invest overseas [4]