Part IVA risks flagged with tax planning and capital losses

“With real estate assets, for example, people might be thinking about whether they should offload their real estate property now while the market is a bit better as there are some predictions that the market might go down,” Mr Butler explained.

Mr Butler said that where SMSFs are selling assets, this brings up important questions in relation to capital gains tax (CGT) events.

“For example, if you are about to sell an asset that will realise a capital gain, do you defer for another financial year? On the other hand, if you are about to sell an asset that will realise a capital loss, do you realise the loss prior to 30 June?” he stated.

Given that most SMSF assets are on capital account, Mr Butler explained CGT events are considered to take place when the contract is entered into and a modified  CGT regime applies to super funds under section 295-85 of the ITAA 1997.

Where a taxpayer, including an SMSF, is seeking to realise a loss to offset a capital gain, Mr Butler said they should be very mindful of the ATO’s views set out in TR 2008/1.

TR 2008/1, he explained, sets outs when the ATO might seek to apply part IVA to wash sale arrangements.

“This ruling is in respect to what the ATO referred to back then as wash sales. Some people had these shares which were really hard to realise and there were some market-based entities that you could go to help you realise your capital loss for a small fee,” he explained.

“The ATO then brought out a ruling to say ‘you can’t crystallise these capital losses in order to offset a capital gain’.”

Mr Butler noted that there was a tribunal decision last year, Merchant and Commissioner of Taxation [2021] AATA 915, which highlighted this issue.

In this particular case, Mr Butler explained that the ATO alleged that the SMSF acquired around 10 million shares in Billabong (International Limited) from the family trust without giving effect to the fund’s investment strategy. This transfer crystallised a tax loss in the family trust which could offset a significantly higher capital gain and the ATO looked to apply part IVA to the transaction. 

The ATO also claimed that the SMSF trustee had done it for an ulterior motive, he explained.

“[The ATO claimed] that the fund did not comply with the sole purpose test because it maintained the fund for the collateral purpose of  obtaining a tax benefit for the family trust and maintaining confidence in the Billabong Group. The ATO also stated that [the SMSF trustee] had failed to comply with s 65 (of SIS Act) as the fund used it’s resources for a member of the fund or their relatives,” he added.

“The real harshness of this was that while Mr Merchant while a dispute with part IVA was underway in respect of his family trust claiming a capital loss, the ATO got stuck into him with respect to his SMSF and rendered him a disqualified person.”

While the trustee requested that the ATO hold off on the disqualification until the tax dispute with his family trust was resolved as issues that would come to light from that (tax) dispute were relevant to his disqualification hearing, Mr Butler said the ATO proceeded with the disqualification anyway.

“Who would have thought that a transfer of listed company shares to an SMSF would have rendered you disqualified?” he stated.

He warned SMSFs to also take their investment strategy seriously in light of the decision last year.

“It’s something that you should be looking at at this time of year because we should have had at least a review or a resolution of a review each financial year to give to the auditor. I can tell you that the auditors are on the warpath.

“Auditors are picking up on all kinds of bits and pieces out there. Auditors are really very keen to report anything that looks, smells or feels dodgy, so be very careful,” Mr Butler said.