New legislation could cause ‘sticky situation’ for commissioner

Concerns are mounting that if a bill currently before the House of Representatives passes into law, the ATO may have to re-consider past interpretations made concerning non-arm’s length income provisions, with the laws likely to be back-dated.

Speaking to SMSF Adviser, SMSF Association director of technical and professional standards Graeme Colley said the draft legislation, titled Tax and Superannuation Laws Amendment (2015 Measure No.2) currently sitting in the House of Representatives, will impact limited recourse borrowing arrangements and instalment warrants.

“Now what this legislation will do [if passed] is treat the beneficial owner of an asset as the legal owner,” said Mr Colley.

The legislation would apply to all limited recourse borrowing arrangements established from 4 September 2007 onwards.

“What it will do is treat the beneficial owner, which is the superannuation fund, as being the legal owner of that asset. So even though you’ve still got to set up the trust arrangement in the same way you do under section 67 or 67 4A as it was previously, the trust will still be there, but the deeming of the asset will now be an asset of the superannuation fund,” said Mr Colley.

If the legislation is passed, the income and expenses of the super fund will continue to be accounted within the super fund.

Under the current rules, in cases where the trustee has got the loan going through the superannuation fund to the instalment warrant or a limited recourse borrowing arrangement, they’ve got the purchase price there with the holding trust, or the bare trust holding that property, that’s the real owner of a particular asset, Mr Colley said.

“What the new legislation will mean is that asset will now treat the superannuation fund as the legal owner of that asset; it won’t change stamp duty but it does change things for capital gains tax because with the legal owner being the super fund on the disposal of that asset, you don’t have a capital gains tax event, and it doesn’t lead to any liability there,” said Mr Colley.

The proposed legislation could have an effect on the way the ATO views non-arm’s length income, he explained.

“If you have a look at the way in which the ATO currently interprets these rules, it’s looking at the distributions from the holding trust, it’s looking at the way in which 295-550 works, from the transfer of the income from the holding trust into the superannuation trust, and in some cases they say it’s not arm’s-length income because it’s what they regard as excessive income,” he said.

According to Mr Colley, however, if the legal ownership of an asset falls under a superannuation fund, the current provision the ATO looks at, 295-550 under sub-section 4, could become redundant in some circumstances.

“This is simply because you’re now looking at 295-550 under sub-section 1 [instead] because the legal owner will, under the new laws, be the legal owner of the property or asset.

“How the ATO decide to view this, I’m not sure – they may have a new set of criteria they need to consider in relation to whether there’s non-arm’s length income.”

Mr Colley said since the legislation went into Parliament, the ATO has not published any private building rulings which discuss the way 295-550 works in relation to non-arm’s length income.

“So we might see a new interpretation of that,” he said.

“The [proposed legislation] is a little bit sticky for the taxpayer because the rules have changed and a little bit sticky for the commissioner because they’ve given their opinion based on the law at the time. Now this law has been back-dated so they’ve probably got to go back and have a re-think about it, [particularly] if a taxpayer decides to appeal a decision.”

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