Commonly overlooked test flagged with related party rules
SMSF professionals and trustees can often overlook the standard employer sponsor test when looking at the related parties rules on the false assumption that it is no longer relevant, says an industry law firm.
Speaking in a recent webcast, Cooper Grace Ward Lawyers partner Clinton Jackson said that one of the reasons that the related party rules can be difficult is that people will often overlook the importance of the standard employer sponsor test when testing for related parties.
“Most people tend to think it’s a relic of the super rules and that it’s no longer relevant for what we’re testing when looking at related parties. Unfortunately, that is not the case,” Mr Jackson said.
A standard employer sponsor, he explained, is an employer who contributes to the super fund for the benefit of a member, pursuant to an arrangement between the employer and the trustee of the fund.
“A standard employer sponsor is different to just a straight employer sponsor; there has to be an agreement between the employer and the trustee,” he clarified.
“What we get concerned about when looking at these issues is that it doesn’t necessarily have to be a formal arrangement between the employer and the trustee.”
Mr Jackson said that there can be concerns where the client controls both the employer entity, are members of the SMSF and also have control at the trustee level because it’s very hard to distinguish between which role the parties are actually acting in where they are making the contributions to the fund.
“Now we’ve had some private rulings on this issue. We had one particular one a couple of years ago, where the clients owned 50 per cent of a company, but the ATO said that the company in that case was not a standard work sponsor, but it is something to watch out for where client does control both,” he explained.
Even where SMSF professionals and their clients are comfortable that it’s not a related party arrangement, he said, they need to be wary of the risk that the ATO can deem an entity to be a standard employer sponsor.
“If we look at an example, we have Gillard Pty Ltd, who makes a contribution to the Malcolm and Lucy SMSF for Lucy; Lucy is just an employee of Gillard Pty Ltd, and she’s not a director or owner. Is it a standard employer sponsor fund?” he questioned.
“Technically, it still can be, but it’s unlikely in this situation that Gillard Pty Ltd has entered an arrangement with the SMSF to contribute to the fund. They’re most likely contributing to the SMSF because Lucy has told them as an employee that she wants her contributions to go specifically to the SMSF.
“If you look at an alternative situation, does it make a difference if Lucy is a director of Gillard and their family trust owns 25 per cent. Well, it could potentially make a difference because we don’t know why Gillard has come to that decision to make a contribution to the SMSF. I think it’s highly likely that the outcome would be the same, but the risk has increased.”