Canny land developers have for some time involved superannuation funds in their projects. The reason for this is obvious; superannuation funds receive concessional tax treatment. However, an alert recently issued by the ATO indicates that this practice is under the spotlight. The ATO is concerned that projects are being conducted in and through super funds on terms that are not commercially appropriate and that the benefit obtained by the SMSF (and thus the tax that is minimised) is therefore greater than if the parties had dealt with each other at arm’s length.
In particular, the ATO is looking at arrangements that display some or all of these features:
- The project is carried out by a “special purpose vehicle”, being a company or trust established solely for that purpose;
- The controllers of the special purpose vehicle are the controllers of the super fund;
- The special purpose vehicle engages related entities to carry out the development work, often at below-market rates;
- The special purpose vehicle or the entities carrying out the development work enter into loans to fund the project. Those loans are not consistent with arms-length dealings (e.g. the interest rate is lower than normal), or the arms-length terms of the loan are not properly followed or enforced;
- The special purpose vehicle earns profits from the project at a higher than would have been expected if the parties had dealt with each other at arm’s length and this profit flows into the superannuation funds.
The ATO’s alert makes it clear that all dealings involved in such a project must comply with the Non-Arm’s Length Income (“NALI”) provisions of the Income Tax Assessment Act 1997. It is not sufficient for the SMSF’s dealings to comply; dealings by the special purpose vehicle must also comply.
The ATO is currently reviewing these types of arrangements, and developers can expect them to be subject to increased scrutiny in the future. FWO recommends that developers who are conducting (or have conducted) development projects through special purpose vehicles involving superannuation funds should urgently review their arrangements and seek advice from their solicitors and accountants.
The ATO is currently reviewing these types of arrangements, and developers can expect them to be subject to increased scrutiny in the future. FWO recommends that developers who are conducting (or have conducted) development projects through special purpose vehicles involving superannuation funds should urgently review their arrangements and seek advice from their solicitors and accountants.
