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SMSF practitioners warned on ‘sham principle’

Miranda Brownlee
17 May 2017 — 2 minute read

In light of an ATO decision impact statement for a case involving a sham loan arrangement, an industry lawyer has warned SMSF practitioners on the dangers of using documentation merely as window dressing for strategies.

The ATO recently released a decision impact statement for a Full Federal Court case, Millar & Anor v. Commissioner of Taxation.

The case involved two taxpayers, Mr and Mrs Millar, who wanted to purchase an apartment on the Queensland Sunshine Coast for $1.1 million.


According to the ATO document, Mr and Mrs Millar’s accountant proposed that they borrow $600,000 from Hua Wang Bank Berhad (HWBB) on the condition that they deposit the equivalent amount, drawn from their Australian superannuation fund, with HWBB, a private bank in Samoa controlled by their accountant.

The commissioner argued that the real transaction was that the taxpayers had impermissibly accessed their Australian superannuation fund to purchase an apartment. The commissioner included the amount of $600,000 in the taxpayers’ assessable income and also disallowed the deductions claimed by the taxpayers for capitalised interest on the loan.

The full Federal Court upheld a decision by the Administrative Appeals Tribunal (AAT) and primary judge Justice Griffiths of the Federal Court that the loan entered into by the taxpayers was a sham, as previously reported by SMSF Adviser.

DBA Lawyers’ director Daniel Butler said the outcome of this decision demonstrates that where SMSF practitioners implement strategies where the documents merely seek to ‘window dress’ the real underlying transaction, they “could easily fall into a sham position”.

The sham principle, he explained, is where window dressing is applied for strategies and “substance doesn’t follow form”.

“Here’s a case where the taxpayers lost on the sham principle. The sham principle was that they had to prove that the loan was a proper loan, but their evidence did not support there being a proper loan, and they had the burden of proof,” Mr Butler explained.

“On the evidence available, the tribunal was not satisfied that the transaction documents taken at face value represented the real agreement between the two parties. Both the Federal Court and the majority of the full Federal Court ruled that the tribunal was not in error in looking at the subsequent conduct between the parties as evidence of their intent, so there’s a whole range of circumstances where intent is reflected.”

Mr Butler said this decision highlights the fact that it’s not just documents that are taken into account, but the conduct and circumstances of the adviser and their client.

“This is not uncommon with SMSFs, there are a lot of strategies that are implemented, but the question is will the strategy really stack up, will it be considered a sham if the documents are mere window dressing [and] not what’s really going on? he said.

The other interesting aspect of the decision related to the question of whether Mr and Mrs Millar were required to withhold tax on the interest that was capitalised under the terms of the loan agreement between them and the overseas bank HWBB, Mr Butler said.

He said an Australian taxpayer who has paid interest to a non-resident normally has to withhold 10 per cent of the payment as interest withholding tax with a country that Australia has a double tax agreement with.

“In this case, the Millars were, in essence, broadly held to be parties to a sham loan and had not actually paid any interest overseas, but interest had been capitalised under the loan by way of book entry to say they had paid interest under this loan agreement of $600,000. What did come as a surprise outcome to the Millars was the book entry gave rise to an obligation to pay interest withholding tax under the Tax Administration Act 1953,” Mr Butler said.

“So it was really interesting that the loan basically went down as a sham but there was still a tax obligation, being a real legal obligation, even though the loan did not succeed in court because it was held to be a sham.” 

Miranda Brownlee

Miranda Brownlee


Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years. 

Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: This email address is being protected from spambots. You need JavaScript enabled to view it.

SMSF practitioners warned on ‘sham principle’
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