WHAT YOU NEED TO KNOW

The ATO has flagged that it is targeting certain retirement phase schemes using SMSFs to avoid tax as they present a compliance risk for SMSFs.

SCHEMES LISTED AS AN AREA OF CONCERN

The schemes the ATO are concerned with claim to protect SMSF assets from creditors by mortgaging them to an asset protection trust commonly called a ‘Vestey Trust’.

A Vestey Trust is a discretionary trust established by deed. It is claimed that the trust is set up to acquire the equity in the SMSF’s assets through an equitable mortgage.

The arrangement also involves:

• the execution of a promissory note by the SMSF
• the lodgment of a caveat by the trust
• optional transfer of fund monies to a bank account in the name of the trust.

More specifically, the equitable mortgage is supported by the execution of a promissory note by the SMSF to the Vestey Trust. This recognises that the SMSF owes a debt to the Vestey Trust. The mortgage is also supported by a caveat by the Vestey Trust over the SMSF’s real property. The arrangement can also transfer the SMSF’s cash holdings to a bank account in the name of the Vestey Trust.

If trustees of SMSFs enter these schemes, they may contravene one or more super laws, and penalties may apply.

WHY SCHEMES THAT INVOLVE A VESTY TRUST MAY CONTRAVENE SUPER LAW

First, these schemes put funds at unnecessary risk because the super system already protects SMSF assets from creditors.

Second, the arrangement is a compliance risk and may contravene one or more super laws. For example, it may:

• result in the giving of a ‘charge’ over, or in relation to, a fund asset by the SMSF trustee
• involve the borrowing of money by the SMSF trustee
• expose fund assets to unnecessary risk if it’s not clear who owns them
• cause the fund to be maintained in a way that doesn’t comply with the sole purpose test.

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

ACTION ITEMS FOR SMSF TRUSTEES

Suppose SMSF trustees are already involved in one of these schemes and think it contravenes the super laws. In that case, they should make a voluntary disclosure via SMSF early engagement and voluntary disclosure service (the service).

The service provides a single-entry point for SMSF trustees and professionals to engage early with the ATO about unrectified contraventions. Before using the service, SMSF trustees are expected to have developed a plan to rectify the contravention as soon as possible. The plan should be submitted to the ATO with the SMSF regulatory contravention disclosure form.

If SMSF trustees voluntarily disclose unrectified contraventions before the ATO starts an audit, the disclosure will be taken into account when determining what compliance action the ATO needs to take.

If an SMSF trustee makes a disclosure about contraventions that occurred in previous years, they must lodge any outstanding SMSF annual returns.

WE’RE HERE TO HELP!

If you have any issues, questions or feedback regarding our monthly SMSF Bulletin or if you’d like clarification or further advice on the content of this month’s edition or any other SMSF audit concern – don’t hesitate to reach out to me at +61 416 123 446 or trosati@rosatiwang.com.