Bryce Figot, special counsel for DBA Lawyers, said that although the decision handed down last month by the Federal Court of Australia concerning the Merchant group is not directly about SMSFs, it contains an important lesson for SMSF advisers.
Figot said the facts presented to the court show that in the 2015 financial year, the Gordon Merchant Superannuation Fund purchased certain listed securities (BBG shares) from the Merchant Family Trust. The trustee of the trust was a related party of the SMSF, and the BBG shares sale had a market value of $5.8 million.
“The purchase crystallised a $56.5 million capital loss for MFT. Merchant would later submit that an objective advantage in the sale was liberating the $5.8 million from the ‘shackles of the superannuation environment’,” Figot said.
“In the same financial year, the MFT sold certain other shares. This sale realised a significant capital gain for MFT. By reason of the sale to the SMSF, the MFT had capital losses sufficient to absorb the whole capital gain.”
The commissioner contended that the predominant purpose of the SMSF’s acquisition was to crystallise the capital los,s and this caused the reasonable conclusion to be drawn that the dominant purpose of the parties to the BBG share sale was to obtain a tax benefit.
The commissioner applied Part IVA of the Income Tax Assessment Act 1936 (Cth) to the arrangement – the general taxation anti-avoidance provision – and disqualified Merchant from being eligible to be the trustee (or director of a trustee) of a regulated superannuation fund.
“The commissioner’s reasons for the disqualification included that Merchant had contravened the operating standards in s34, the sole purpose test in s62 and the provision of financial assistance in s65 of the Superannuation Industry (Supervision) Act 1993”, Figot said.
He said that Merchant subsequently applied to the Administrative Appeals Tribunal to review the disqualification.
“Last year, despite finding that there were contraventions of the SISA, the AAT nevertheless set aside Merchant’s disqualification,” Figot said.
He continued that the AAT found that the risk of future non-compliance was unlikely for the following reasons:
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Merchant was a fit and proper person.
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There was no evidence that Merchant was advised by his advisers that the transaction risked breaching the SISA.
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Merchant had given undertakings to mitigate the future risk of non-compliance.
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The contraventions of the SISA, while serious, all related to a single course of conduct.
In relation to protecting the investing public, Merchant was only likely to be a director of the trustee of his own superannuation fund. Further, he did not need protecting from himself.
The offending transaction was suggested by the SMSF’s auditor without any warning of compliance issues. There was no useful purpose served by disqualification in this instance.
“However, there were still the taxation questions, such as Part IVA and the recent Full Court decision was considering these taxation questions,” Figot said.
“The full court held that the dominant purpose was one of obtaining the tax benefit. More accurately, the court held Merchant and MFT had not made out its appeal grounds that an earlier Federal Court judge had erred in holding that the dominant purpose was one of obtaining the described tax benefit.”
Figot added that it is important to remember, from the SMSF’s point of view, all that the fund did was acquire listed securities at market value, albeit from a related party.
“Many advisers might say that it is fine for an SMSF to acquire listed securities at market value. However, it is not necessarily that straightforward: while Merchant was ultimately not disqualified, various contraventions nevertheless occurred,” he said.
“Therefore, advisers should be aware that transactions that appear ‘ordinary’ may still attract ATO scrutiny, particularly where additional facts might exist. Again, in this instance, the SMSF was acquiring listed securities from a related party at market value.”
He said advisers should remember to obtain a proper understanding of the overall proposal and, where necessary, should “dig deep” and consider whether there are any additional or unusual facts that need investigating.
“While Merchant could retain his SMSF, the MFT or its beneficiaries were likely to be subject to significant extra tax as a result of Part IVA.”
The line between tax minimisation and tax avoidance continues to be blurred. I really didn’t understand the stance taken by the ATO that the transaction is open to scrutiny under Part IVA – at what point can I do or no do things to minimise my tax and when is that considered tax avoidance?
If I sold an asset 12 months and 1 day, is that tax avoidance because the main benefit was to avail myself of the CGT discount?
I can’t understand this obsession with transferring listed shares, to or from a SMSF.
What would have happened had the trust just sold the shares for cash, on the market? Probably not much unless they allege a wash sale, but at least the SMSF would not be involved.
The SMSF could have brought the same amount of shares on the market if that’s what it really wanted them that badly.
People seem to think they are saving something or preserving capital gains or something by transferring shares off market. That’s wrong. That’s the first myth to dispel when a client suggests this.
It might save you a bit of brokerage, but not much, your accountant can’t do it, so don’t ask, and share registries now charge $ for off market transfers and will turn you upside down for certified ID if you try.
If MFT sold in ASX &
If SMSF purchased from ASX
Then there is no Part IVA
Exactly. So, where is the mischief?
On face value terrible decision – just like the spotless case – as I understood the initial case, the BBG shares purchased by the sfund reduced the funds liquidity and its ability to meet mr merchants required pension payments to meet his lifestyle of $500k per annum.
This raised the question of the sole purpose test of the sfund – why was the fund buying these shares when its sole purpose is to provide retirement benefits to the member.
Just turn off the pension then.
Next thing we know, making a donation will be knocked over, because it was a charity that you are on the board of?