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Sole Purpose and NTLG.pdf - What SMSFs can invest in

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					                               SMSFs: Investments, the sole
                               purpose test and the latest
                               from the NTLG
                                    The 2009 SISFA Forum

                                    11 September 2009




                                                              1


What SMSFs can invest in

 Starting point: SMSFs can invest in any asset
 (subject to power in the SMSF deed) unless
 would breach the law
 Assets include:
  Shares in listed companies/listed securities
  Shares in a private company
  Units in a widely held unit trust
  Interests in other trusts
  “Business real property”
  Other real property
  Loans
  Other assets
                                                          2


Sole purpose test

 Test: SMSF trustee must maintain the SMSF
 solely for:
  One or more core purposes (eg providing retirement or
  death benefits); or
  One or more core purposes and one or more ancillary
  purposes (eg because of termination of employment or
  incapacity)

 Is an objective test




                                                          3


Sole purpose test cont.

Sole purpose – not dominant purpose or
principal purpose
However the Courts (Case X60 and the Swiss
Chalet case) and the ATO (SMSFR 2008/2) have
accepted that a SMSF trustee may have other
incidental, remote or insignificant purposes
Sole purpose test can apply to activities of a
trust or company in which a SMSF holds an
interest or a share (Case X60 and the Swiss
Chalet case)
                                                          4

Sole purpose test: ATO’s view (SMSFR
2008/2)

 Factors that suggest a benefit will breach
 the sole purpose test
  Additional benefit negotiated or sought
  Additional benefit influenced decision making process
  Additional benefit provided to member to detriment of
  SMSF
  Pattern of events suggest other benefit provided




                                                          5

Sole purpose test: ATO’s view (SMSFR
2008/2) cont.

 Factors that suggest a benefit will not
 breach the sole purpose test
  Additional benefit inherent or unavoidable
  Additional benefit remote, isolated or insignificant
  Additional benefit provided on arm’s length
  commercial terms
  Activities in accordance with covenants in s52 SISA
  Investments and activities consistent with investment
  strategy of SMSF
                                                                        6

ATO examples of the application of the
sole purpose test from SMSFR 2008/2

  Members of a SMSF receiving an unrequested upgrade of a holiday
  apartment owned by a widely held unit trust in which the SMSF holds
  units - no breach of sole purpose test

  Members of a SMSF staying for free at a holiday apartment owned by
  a company in which the SMSF holds shares where the SMSF trustee
  specifically negotiated the free use - breach of sole purpose test

  Members of a SMSF staying at a holiday apartment owned by the
  SMSF for a few days in order to conduct necessary repairs where the
  members pay a market rent – no breach of sole purpose test

  The hanging of art work owned by the SMSF rent free in the members’
  house or business premises - breach of the sole purpose test




                                                                        7

ATO examples of the application of the
sole purpose test from SMSFR 2008/2 cont.

 Investing in listed shares by the SMSF trustee with the intention
 to obtain a shareholder discount card for the members - breach
 of the sole purpose test

 Reimbursement of travel expenses incurred by the SMSF
 trustees to look at property investments for the SMSF where the
 trustees also holidayed - breach of the sole purpose test

 Where a SMSF trustee enters into an “instalment warrant
 borrowing arrangement” with a related party, where the related
 party charges the SMSF an inflated interest rate – breach of the
 sole purpose test
                                                                  8

NTLG Superannuation Technical Sub-
Group issues

1. Contributions and TR 2009/D3
  Current definition of contribution in TR
  2009/D3: an amount will be a
  superannuation contribution if “it
  increases the capital of the
  superannuation fund”




                                                                  9
NTLG Superannuation Technical Sub-
Group issues cont.
 Possible view of ATO from NTLG-STSG -
 “working rule” a contribution is a
 payment to a superannuation fund
  Exceptions and carve outs to the general working rule
  Creation of rights not contributions (distribution from a
  discretionary trust?)
  Payments in respect of rights not contributions
  Third party payment of liabilities (payment by an employer of
  the SMSF’s audit fees?)
  Reimbursement agreements
  Is an objective test
                                                                10

NTLG Superannuation Technical Sub-
Group issues cont.

2. Contributions cap and the rejecting of
 contributions under powers provided in
 the SMSF deed
3. Under payment of pensions
 Result – not in pension phase for the year
 Possible solution – rights under a pension
 agreement




                                                                11

Other current issues: non-arm’s
length income/special income
 Is an ATO focus
  Mark Konza speech in March 2009

 FFWX v FCT
  Shares in a private company acquired by SMSF for $51,218
  being less than market value (approximately $590,000)
  Private company held shares in a public company
  Private company paid dividends (funded from public
  company dividends) to SMSF in proportion to SMSF’s
  shareholding in the private company
  Private company dividends were special income due to
  acquisition of private company shares by SMSF for less than
  market value
                               12




Thank you for your attention
Questions?

				
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