Transfers of life interests in business real property to SMSFs are now firmly on the ATO’s radar, with these arrangements triggering a variety of compliance concerns with SMSF and income tax regulations.
“So what happens in those cases is that an individual owns business real property that is earning rent. The individual, who is often a member of an SMSF, grants a legal life interest over the property to the SMSF that’s based on the life of a specified person,” said the ATO’s Kasey Macfarlane at the SMSF Adviser Technical Strategy Day in Sydney last week.
“What that means is that the SMSF doesn’t actually get the full legal interest in the business real property, they just get an interest in that property until the end of the specified person’s life. And then what that means is that the SMSF is entitled to the rental income, not the individual with legal title to that property.
“The SMSF then treats that income as concessional taxed or tax exempt, and then when that specified person dies, the life interest is extinguished, so the SMSF no longer has any interest or entitlement to income, and the person with that legal title resumes complete ownership of the property.
“The income that is generated through the SMSF in many cases, whilst that life interest is in place, is often then paid out to the individual through a pension or alternatively reinvested, increasing the member’s account.”
Further guidance is set to be released on this particular arrangement, as the ATO is becoming increasingly concerned that this mechanism is being used to divert income that would have otherwise been taxed in the individual’s hands at their marginal rate.
It could also be seen as a mechanism to get income into an SMSF outside of non-concessional contributions, and may be utilised to minimise capital gains tax outcomes for the individual owners of the property.
The ATO is also concerned by the increasing number of super fund members deliberately exceeding their non-concessional caps.
It appears that members are using the refunds of excess non-concessional contributions to reduce the taxable components of their benefits.
“There appears to be no reason why a super member would do so other than to generate the potential downstream tax benefit that arises when their super benefit is eventually paid,” Ms Macfarlane told delegates at the SMSF Adviser Technical Strategy Day in Sydney.
She warned of the possible application of part IVA of the Income Tax Assessment Act 1936 and the general anti-avoidance rules in those particular arrangements.
The ATO has also recently started a three-year program to ensure all funds comply with their obligation to get an annual audit and report it to the regulator.
“Unlike previous reminder strategies, we’ll undertake cases to consider whether trustees who’ve repeatedly failed in these obligations, particularly in cases where there are significant assets or activity, are fit and proper to remain in the system,” Ms Macfarlane said.
She also stressed that auditors, in particular, are under regulatory watch, with independence being a key area of focus.
“While we’re aware a high percentage of SMSF auditors are also registered tax agents, our main concern is if they’re also involved in preparing accounts and statements for SMSFs they audit,” said Ms Macfarlane.
“We continue to monitor our data and information and if we identify additional cases where independence risks may be at play we’ll contact the auditor in question.”