Are dual fund strategies viable?
With recent ATO commentary that dual fund strategies might attract ATO attention, this article considers some of the tax and superannuation law issues associated with such strategies.
Against the backdrop of recent superannuation tax reform, one strategy that has attracted attention involves a member with a total superannuation balance exceeding $1.6 million establishing a second SMSF. The idea is that the same member might have an accumulation SMSF and a pension SMSF, the assets funding the pension SMSF falling within the transfer balance cap. There may be genuine commercial reasons for maintaining two funds, for instance, ease of accounting for pension and accumulation assets. One perceived tax advantage might be that the assets of the pension fund are higher yielding or expected to generate signifi cant capital gains in the future, all of which will be tax free.
Related party acquisition
The dual fund strategy involves the transfer of assets from one fund to another fund. One issue is whether such a transfer breaches s66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act). This investment standard prohibits a trustee from intentionally acquiring assets from a related party of the fund. A related party of a fund includes the trustee of a trust where a fund member controls the trust. Given that Part 8 of the SIS Act and the SIS Act generally, distinguishes between a trust and a superannuation fund, arguably the transferor fund would not be regarded as a trust, and therefore a related party, for these purposes. The above position is not entirely without doubt. There are two specific exceptions to s66 relevant to transfers between superannuation fund trustees. It might be said that if it were not possible for the trustees of superannuation funds to be related parties, these exceptions would not be required. That said, the mere existence of these exceptions should not, in the authors’ view, determine the interpretation of s66. In our view, these exceptions might be construed as being only included in the legislation to avoid any doubt. The above interpretation is also consistent with the overall policy of s66, namely to prevent bringing assets into the superannuation system through related party dealings. It is not to restrict the transfer of assets within the superannuation system.
The s66 issue does not arise if the assets transferred are cash, business real property or listed securities acquired at market value.
CGT on asset transfers and documentation
The transfer of CGT assets from one fund trustee to another will usually give rise to CGT Event A1. When considering the assessability of any capital gain arising on the disposal, the following should be noted:
- Where a retirement phase income stream is or has been paid from the transferor fund, a proportion of any capital gain on the transfer should constitute exempt current pension income;
- The transfer of assets to the second fund can only be made by lump sum payment; and
- To make a lump sum payment, existing pension balances in the fund first need to be commuted to accumulation.
These observations are relevant to documenting the transaction as a commutation and to ensuring that the transaction complies with the specific requirements of the fund deed. They will also have significance to transfer balance cap compliance.
Stamp duty on transferring real property or interests in an entity that owns real property between funds must also be considered. The duty outcome will depend on the jurisdiction in which the property is situated. For example, in NSW and Victoria a duty exemption is available for transfers between funds where the transfer is in connection with a person ceasing to be a member of the fund or otherwise ceasing to be entitled to benefits from the fund. Some state revenue offices require the member to cease to have an entitlement to all benefits from the fund. This issue might be overcome by establishing two new funds so that all of the member’s interests in the first fund can be extinguished in connection with the transfers.
General anti-avoidance provisions
As mentioned, the ATO has suggested that there may be a risk of Part IVA applying to dual fund strategies. Part IVA operates to deny a tax benefit where a taxpayer enters into a scheme for the sole or dominant purpose of obtaining the tax benefit. The authors consider that the Commissioner would have signifi cant difficulty in applying Part IVA to dual fund arrangements. There are numerous genuine commercial reasons that may form the sole or dominant purpose for establishing a new pension fund. Having all pension assets in one fund may minimise accounting and compliance costs by not having to account for mixed accumulation and pension balances. A further reason might be for succession planning purposes, where assets are separated so as to be passed to different beneficiaries upon the death of a member. The identification of a tax benefit in connection with a scheme may be elusive for the ATO in that the tax benefit relies on the pension assets outperforming the accumulation assets. In the case of an exempt capital gain, any tax benefit may not arise until many years into the future when the asset is realised. Of course, the application of Part IVA will always depend on the circumstances and therefore caution should be exercised. Final observations The viability of the dual fund strategy will ultimately depend on the particular circumstances and commercial considerations regarding whether the costs involved in administering an additional fund are outweighed by the potential benefits. Careful consideration of the issues and specific documentation is required to effectively implement these arrangements.
Nicole Santinon, senior associate & Peter Slegers, partner, Cowell Clarke Commercial Lawyers