The Commissioner of taxation has today issued to separate taxpayer alerts – TA 2010/5 and TA 2010/6.
Taxpayer alert TA 2010/5 concerns the use of an unrelated trust to circumvent superannuation lending restrictions. Taxpayer alert TA 2010/6 concerns the use of an unrelated trust to access funds of a private company in an attempt to circumvent Division 7A.
TA 2010/5 concerns an arrangement where an organiser sets up a trust which purports to offer fixed rate of interest investments to unrelated entities. A self managed super fund then invests in the trust. A member of the superannuation fund then borrows money from the trust. Each borrower enters into a loan agreement with the trust. The terms of the loan may vary in the use of the borrowed funds may be for multiple purposes. Each borrower makes interest only repayments on the loan to the trust for a substantial period of the loan. Investment and loan fees payable under the arrangement may be considered excessive.
The Australian Taxation office considers that the arrangement given gives rise to a number of issues. It is considered the sole purpose test may be breached where the purpose of the fund investment is to obtain a present day benefit for members of the superannuation.
It is also considered the trustee of the fund may breach section 65 of the SIS act. This prevents a trustee from lending money or giving other financial assistance using resources of the fund to a fund member or a relative.
The alert also lists a number of other possible breaches of the SIS act. It also identifies whether the income derived by the superannuation fund may be non-arm’s-length income and taxed as special income for that reason.
TA 2010/6 involves an organiser setting up a trust offering fixed-rate interest investments to unrelated entities. It is similar to the arrangement in the previous taxpayer alert in that a private company invests in the trust.
The moneys invested are then lent to borrowers. These borrowers may include a shareholder of the company making the investment in the trust. Each borrower enters into a loan agreement with the trust. The terms of the loan may vary with the use of the borrowed funds for multiple purposes.
The Australian Taxation office considers that the general anti-avoidance provisions of part IVA of the Income Tax assessment Act 1936 are likely to be triggered and the provisions of Division 7A by reason of the interposed entity provisions in subdivision E.
Clients are warned to be wary of entering into any such arrangements.