ATO deputy commissioner Kasey Macfarlane says fresh and ongoing concerns regarding business ventures have sparked the tax office’s interest in recent months, and they will be part of its compliance focus.
“For example, there’s nothing actually specific in the regulatory provisions that prevent an SMSF from carrying on a business. However, the various regulatory rules do actually make it quite difficult in many circumstances to maintain regulatory compliance when they are carrying on a business,” Ms Macfarlane said at the SMSF Adviser Technical Strategy Day.
“Some of the things that you need to be mindful of is whether the business activities are allowed under the trust deed [and] that the business is being operated for the sole purpose of providing retirement benefits to members,” she said.
“The restrictions on when an SMSF can borrow money makes it very difficult for an SMSF to undertake a normal business operation, because usually as a part of a business’ working capital arrangements they often borrow money, and also there’s the issue of making sure that relevant transactions are at arm’s length,” she added.
“So some of the things that would attract our attention is if you’ve got an SMSF carrying on a business that is commonly carried out as a hobby or a pastime, if it’s linked to other trading entities of the members, and also if business assets are available for private use of the trustee or related parties.”
Ms Macfarlane also flagged numerous rising concerns in relation to property development ventures and SMSFs.
“Where SMSFs go into property development ventures with other joint venturers, depending on the terms of the agreement and arrangements that the other joint venturer might have in place, it might lead to them inadvertently having a charge over the asset,” she said.
“The other concern here is from an income tax perspective as well around non-arm’s length income. We have seen some cases of joint venture property developments where the parties are purportedly unrelated but the proportion of income that the SMSF obtains from that arrangement is significantly greater compared to what they are bringing to the venture.
“That raises issues around NALI, it also raises those more broader issues around if SMSFs are being used as a mechanism or a vehicle to receive business income or profits with a view to accessing that more concessional rate.
“So that is something that is on our radar and something that we are looking at very closely at the moment as well.”
Ms Macfarlane also cautioned SMSF professionals that if their clients are approached to invest SMSF moneys on the basis that their investment in question can be used as a means to providing present-day benefits to members or relatives, there are “significant concerns” around that for the ATO.
“The use of an SMSF property investment in that way will contravene the requirement that an SMSF be used for the sole purpose for providing for members in retirement and also will potentially lead to a breach of a number of other regulatory rules in relation to related-party transactions and the prohibition on providing loans and financial assistance to members and their relatives,” she said.