New ATO guidance ‘provides clarity’ on buy-sell agreements

The ATO is reviewing its guidance material on ATO ID 2015/10 to make clear its position on buy-sell agreements after some industry backlash earlier this year.

An ATO spokesperson told SMSF Adviser the interpretative decision by the ATO, ATO ID 2015/10, which found that an arrangement involving a buy-sell agreement breached the sole purpose test, was “based on the facts of that specific case” only.

“The ATO is reviewing its web guidance material to make it clear that the presence of a buy-sell agreement, on its own, does not result in a breach of the sole purpose test,” the spokesperson said.

McPherson Super Consulting director Stuart Forsyth said shortly after the release of this ATO ID in March last year, some in the superannuation industry interpreted it as meaning one could never have insurance that was in any way connected to a buy-sell arrangement.

“Whereas, in fact, the situation they dealt with in the ATO ID was a situation where the insurance was only taken out and facilitated by a buy-sell arrangement,” he told SMSF Adviser.

“So if you already had the insurance, for example, you might have a different answer. So it is a clarification and indication [by the tax office] that the view is not as broad as some people were thinking it was.”

Mr Forsyth explained this interpretative decision does not apply to all situations and that with each individual situation “you must work through the facts”.

“What a lot of people forget is that an ATO ID is a record of an ATO decision on a particular case; it’s not a statement on the commissioner’s general policy and conclusion for all cases, but often people outside the ATO read more into ATO IDs than they should,” Mr Forsyth said.

Tim Miller of Miller Super Solutions said that in ATO 2015/10, the tax office made the decision that a particular buy-sell arrangement was not appropriate from an SMSF perspective, because it effectively benefitted someone who was not a member of the fund.

Mr Miller said it looks as though the ATO is correctly identifying that the law does not necessarily prohibit the use of buy-sell arrangements inside super funds.

“The use of insurance in a member’s account must satisfy the insurance requirement, but it doesn’t necessarily state that you can’t hold the insurance for other purposes, as long as it can satisfy the sole purpose test,” he said.

“Where people are potentially using buy-sell insurance for, say, limited recourse borrowing arrangements or funding asset liabilities, than you could conceivably argue quite strongly that that insurance is for the purpose of ensuring the super fund can meet its liability to ensure that the member can maximise their benefits.”

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