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Asset protection and SMSFs — a Tax Office warning

By Matthew Burgess, View Legal
12 January 2023 — 4 minute read

The ATO recently flagged material concerns with gift and loan back arrangements in relation to SMSFs.

The gift and loan back arrangement (and various iterations of it) has arguably had a chequered history, and often seen branding developed to conveniently label the steps involved, for example:

(a) Beta Strategy (which was the subject of a failed patent application in the case of Grant v Commissioner of Patents [2006] FCAFC 120)

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(b) Legacy Protection Strategy

(c) Secured loan arrangement

(d) Synthetic transfer

(e) Capital protection strategy using a lineal descendent or bloodline trust

(f) 100% security strategy — to protect your assets from thieves such as the tax man (see Ed Burton and his ‘Diamond Inner Circle Coaching and Mastermind Alliance’ as part of the ‘Vital Link Financial Education’ Group circa 2004)

Recently, another productised version of the arrangement has gained the attention of the Tax Office.

Branded as the Vestey Trust or the Master Wealth Control Package, the arrangement is promoted as part of a wider property and investment offering that promises advice on “how to locate and invest in undervalued property, undertaking property developments, locating undervalued businesses, renovating for profit and how to secure and grow your wealth” by the DG Institute founded by Dominique Grubisa.

As with all the various versions, or brands, of a gift and loan back arrangement, the key components appear to be driven by managing asset protection that would be otherwise problematic due to related tax and stamp duty asset transfer costs.

That is, in broad terms, the owner of an asset gifts an amount equal to their equity in the asset to a family trust (or low risk spouse). The family trust then lends an amount of money to the owner and takes a secured mortgage over the property or registers a security interest on the Personal Property Securities Register over the personal assets of the individual the protection is intended for.

Implemented correctly, the gift and loan back approach ensures there are no CGT or stamp duty consequences to achieving asset protection, subject to the claw back rules under the bankruptcy regime and various state based property or conveyancing acts.

Vestey Trusts 

The integrity of the particular strategy promoted by DG Institute has been subject to attention in mass media for some years, for example Richard Baker in The Sydney Morning Herald in 2020 identified that the promoters were claiming that “If you have superannuation, you want to protect that now. The current laws say that’s already protected. But in a grab for cash and a time of crisis like this where the government is supporting the whole nation for an indefinite period, that is a big pool of money that is up for grabs and they have the power to enact laws to take that. We want to protect it now”. 

The articles also pointed out that:

  1. There was nothing to indicate superannuation laws would be changed to see assets exposed to financial misadventure.
  1. The organisation instructed ‘students’ of the courses to buy property from people identified in Family Court proceedings as divorcing or financially struggling (i.e, to secure properties from distressed vendors).
  1. Dominique Grubisa engaged her parents in property and financial deals even though both were struck off the NSW solicitor’s roll in 2013 for fraud.

Tax Office warning 

Now the Tax Office, in a pre-Christmas trust-related release (continuing an apparent tradition of late December trust related releases — including in recent years announcements on trust splitting and trust vesting) has flagged material concerns with the strategy in relation to SMSFs.

Titled ‘SMSFs and schemes involving asset protection’, the Tax Office confirms that as a threshold issue the arrangement is unnecessary because the superannuation system already protects SMSF assets from creditors.

This fundamentally important observation is supported with a number of further comments focused on the likely superannuation related compliance risks, for example that the arrangement may:

  1. Result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee

  2. Involve the ‘borrowing’ of money by the SMSF trustee

  3. Expose fund assets to unnecessary risk if it is unclear who owns them

  4. Cause the fund to be maintained in a way that doesn’t comply with the sole purpose test

  5. Cause SMSF money to be used for costs related to asset protection arrangements entered into by members to protect their personal or business assets, which is prohibited because these expenses are not incurred in running the SMSF.

Based on publicly available information there is no doubt that each of the concerns set out by the Tax Office are correct and likely to be applicable to any gift and loan back arrangement involving an SMSF. 

Other potential issues 

For arrangements not involving SMSFs, despite the high profile case of Re Permewan No 2 [2022] QSC 114, appropriately implemented gift and loan back arrangements appear to be a valid and revenue effective asset protection strategy. This said, there are a number of potential issues that always need to be considered, for example:

  1. Care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business). 

  2. While the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor. 

  3. The impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home should be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act, which will typically be the case. 

  4. To the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing that lending (to whatever level it may be from time to time) as a first priority before the trust’s second mortgage.  

  5. The provisions of the Tax Act under subdivision EA need to be considered. While there has been some significant dilution of the circumstances where subdivision EA will apply given the Tax Office’s approach to UPEs, in some situations it remains potentially relevant. In particular, the second ‘tranche’ of the gift and loan back arrangement involving a loan out of a trust can be problematic if at the time the loan is made, there was an unpaid distribution to a corporate beneficiary.

Matthew Burgess, director, View Legal 

Asset protection and SMSFs — a Tax Office warning
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