A recent case in the Federal Court, which dealt with a trustee who contravened the sole purpose test, the arm’s length rules and the in-house asset rules, has some key lessons for SMSF practitioners and their trustee clients, according to one industry lawyer.
The case between the deputy commissioner of taxation and A. Lyons involves an SMSF Mr Lyons established in 2008, DBA Lawyers director Bryce Figot explained to SMSF Adviser.
Between 2008-2010, Mr Lyons and his wife were running a retail business which was experiencing financial pressure.
Mr Lyons set up an SMSF, and under the guidance of a financial adviser, was told the SMSF could lend money to Mr Lyons’ brother-in-law, who can then lend to the business, Mr Figot said.
The SMSF was established towards the end of 2008, and received rollovers of approximately $200,000 in 2009.
During the 2008 financial year, the fund made six loans to Mr Lyons’ brother in law, and that money was leant back into Mr Lyons’ business.
The sole purpose test, in-house asset roles, arm’s length rules were contravened, as well as the prohibition of financial assistance to members and relatives, Mr Figot said.
Mr Figot explained the ATO made the fund non-complying in the 2009 financial year, so in accordance with the formula written in legislation, the ATO looked at the market value at the end of the year before it was made non-complying, which was minimal.
“It’s not like half the fund went up in a big tax bill. So that’s some of the silver lining, but there’s still plenty of grey to this cloud,” Mr Figot said.
Mr Lyons was issued with a $32,500 penalty for making six loans to a relative or member of the fund, and ordered to pay $5000 to the tax office.
However, several factors worked in Mr Lyons’ favour.
The court took into consideration that Mr Lyons received “wrong” financial advice when reaching a judgement, which doesn’t reflect well on the financial adviser, Mr Figot suggested.
The court also emphasised how prompt, timely, and frank Mr Lyons’ admissions were, Mr Figot said.
“If there’s a problem, address it as soon as possible. That’s one big implication,” Mr Figot said.
Mr Figot also said it’s interesting to note the difference which year a fund is made non-complying can make.
“They went non-complying in the 2009 financial year, with negligible tax cost. Had they gone non-complying in the 2010 financial, they would’ve been up for [possibly] $90,000 of tax,” Mr Figot said.
“It is something to be aware of, because sometimes you do have a bit of flex in negotiations with the ATO before they make you non-complying, to say ‘ok well make us non-complying in this year or that year’.
“You can request anything of the ATO, [it depends] whether or not they choose to do anything. To the extent you feel you’ve got any power with the ATO in your negotiations, number one try to not go non complying, and if you have to go non complying, work out what year could be best for your client.”
In addition, the new trustee penalty regime did not apply at the time, which may have seen different outcomes for Mr Lyons, said Mr Figot.
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