The facts of the case are very straightforward.

A couple, at the urging of their son, established a self managed superannuation fund to which they subsequently rolled over their various super accounts.  All three were members and trustees of the fund.  Approximately $40,000 was rolled into the fund.

The son, who had addiction issues, subsequently rolled out the previously rolled in monies.  The rollouts were unauthorised by the trustees and were contrary to the SIS benefit payments standards.

The other trustees, once the rollouts were discovered and on the advice of a registered tax agent, treated the unlawful benefit payments as if they were loans to an unrelated entity.  Financial statements and regulatory returns were prepared and lodged on this basis.

Eventually, as the loans constituted over 90% of the value of the fund, the ATO took an interest in the fund.  The true situation quickly emerged upon an ATO investigation into the fund.

The ATO issued a notice of non-compliance in respect of the fund.  All three trustees referred the decision to issue the non-compliance notice to the AAT.

The AAT in a short judgment upheld the actions of the ATO and confirmed the non-compliance status of the fund.

A number of interesting comments can be made on the case.

1. The son was able to rollout monies from the fund because the bank account of the fund only required one signatory.  A basic control mechanism is that at least 2 signatories should be required.
2. Given that only about $40,000 was ever rolled into the fund and no material contributions were made to the fund, it seems the decision to set up a SMSF in this situation could not be justified on any reasonable basis.
3. Once an unlawful benefit payment has been detected, it is better not to cover up the unlawful payment.  The cover up of an issue will usually involve more reprehensible conduct than the disclosure of the issue.
4. The unlawful payments were able to be covered up as the Trustees’ adviser acted as adviser, tax agent and auditor of the fund.  Without the multiple roles, the cover up would not have been attempted, or, if attempted, would not have lasted as long as it did.
5. Be wary of being involved in any SMSF of which a member has addiction issues.

The AAT case related purely to the issuing of the notice of non-compliance.  The AAT case did not address the liability of the registered tax agent (the registered tax agent was not a party to the proceedings) or the liability of the trustees in their knowing adoption of false financial statements and the signing of false tax and regulatory returns.
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It is highly likely that the registered tax agent will be the subject of other ATO enforcement actions as will the trustees.

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The changes to the limited recourse borrowing rules for SMSFs apply to arrangements put in place on or after July 7, 2010 or to refinances of existing loans on or after 7 July.

Pre 7 July 2010, more than one asset could be acquired and assets did not have to be the same form or type in order to undertake a single limited recourse borrowing arrangement. For instance, a portfolio of
shares in different companies could be acquired under a single arrangement

“We believe the definition of a single acquirable asset may catch out SMSF members who are not aware of the legislative changes,” said Mr Burgess. “This is because the changes mean separate borrowing
arrangements must be in place for shares in different companies or even different classes of shares in one company, with compliance potentially messier than when dealing with property.”

The acquisition of real property on separate titles is also not permitted unless a separate borrowing arrangement is put in place for each title. For example, several residential units in the same apartment
complex with the same characteristics will need separate borrowing arrangements.

“The Australian Taxation Office (ATO) has recently advised that where assets are for practical purposes inseparable, or where there is an incidental ancillary asset of a very low value, the assets may be treated
as one asset. However, it is still unclear how this will be determined so SPAA believes advisers and trustees should proceed on the basis that each title represents a separate asset,” Mr Burgess said.

“The single acquirable asset rules have implications for advisers and trustees regarding the way in which assets can be acquired and the number of borrowing arrangements which may need to be put in place,”
he said.

Another contentious issue concerns improvements to properties for which limited recourse borrowing arrangements have been put in place after 7 July 2010. In essence, renovations or improvements are not
permitted as they may give rise to a different asset to the single acquirable asset that was the subject of the arrangement. Importantly, this would be the outcome regardless of the source of the funds used to
renovate or improve the asset.

“In the context of real property, the inability to improve the asset during the life of the loan is a significant issue and extreme care should be exercised where it is the intention of an SMSF trustee to alter a
property acquired under a limited recourse borrowing arrangement,” Mr Burgess said.

If the property is improved, the limited recourse borrowing arrangement will have to cease and the improved property transferred to a new borrowing arrangement. In situations where it is the intention of
SMSF trustees to improve a business real property, Mr Burgess said the parties could consider an agreement with the vendor to do this before the SMSF purchases it and consider adding this to the sale
price of the property.

“The rules which apply to a limited recourse borrowing arrangement put in place on or after 7 July 2010 are much more restrictive than the previous rules which applied to arrangements put in place prior to 7
July 2010. Trustees looking to use the limited recourse borrowing rules should seek sound advice from a SPAA Specialist Adviser to fully understand the opportunities and the risks involved,” Mr Burgess said.

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