Overseas bank loan results in hefty trustee penalties

In a recent Federal Court decision, two SMSF trustees are facing hefty tax penalties after an arrangement with a Samoan bank, executed by their accountant, was considered to be an early withdrawal of benefits by the court.

Speaking to SMSF Adviser, DBA Lawyers director Dan Butler said the Federal Court decision in Millar v Commissioner of Taxation [2015], was an appeal on several questions of law from an earlier decision made by the Administrative Appeals Tribunal of Australia (AAT).

The AAT had ruled that an SMSF had made a sham deposit of $600,000 in a Samoan bank, called HWBB, which was licensed under Samoan law to provide financial services to clients of Vanda Gould, the long-term accountant and financial adviser of the SMSF members.

“An amount of $600,000 came back several days afterwards to the mum and dad members as a personal loan to purchase a $1.1 million apartment in the Queensland Sunshine Coast, purportedly by way of a loan from HWBB to the mum and dad personally,” Mr Butler explained.

Mr Butler said the legal documents for these arrangements stated the trustees would make regular repayments to the bank for the loan and, separately, that the bank would make payments of interest to the SMSF for the $600,000 deposit.

“This sort of protocol did not happen and therefore the ATO alleged that it was a sham – that is, the intent of the legal documents were not given practical effects so it was treated as a window-dressing exercise,” said Mr Butler.

The Federal Court upheld the Tribunal’s decision and Mr and Mrs Millar were assessed on $300,000 each due to the early withdrawal of benefits when they did not satisfy a condition of release.

Mr Butler said each of the $300,000 assessable amounts will be taxed at their marginal tax rates.

“They also had to pay hefty penalties of 75 per cent and 90 per cent of the tax payable in the relevant years,” he said.

“In this case, the arrangements and documents in question were not complied with as they were supposed to have effect, e.g. no repayments on the loan and lack of interest being paid on the SMSF’s deposit.”

Mr Butler said Mr and Mrs Millar should have taken an active or inquisitive role in relation to questioning Mr Gould or the Samoan bank in respect to the amount deposited by the SMSF, and the fact it came back several days later by way of a loan from a Samoan bank that was linked to their adviser, Mr Gould.

**This story was amended on 6th November 2015**

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