Kym Bailey, Technical Services Manager at JBWere, discusses the AAT decision in Hart v Commissioner of Taxation which revealed a plethora of breaches of the Superannuation Industry (Supervision) Act 1993, as well as mismanagement by a trustee.
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A recently decided AAT case reads like a training module written on superannuation law – the one’s that have extreme examples to demonstrate key learning outcomes and seem too exaggerated to be true. It is however Case Law and makes compelling reading, with the expose of a litany of breaches, and the revelation of mismanagement by a SMSF trustee.
In Hart and Commissioner of Taxation (Taxation) [2018] AATA 1267 decided on 15 May 2018, the Tribunal affirmed the ATO decision to disqualify a person from acting as a trustee, investment manager or custodian a superannuation entity either individually or as a representative.
This seems like harsh punishment, but not once you get a sense of what happened.
The action that led the Fund to the Tribunal was the lodgement of an Auditor Contravention Report (ACR) after the Auditor identified a property owned by the SMSF was not in the name of the fund. This is a key requirement for SMSF investment – assets must be in the name of the trustee of the fund or, readily identifiable as a fund asset. The ACR lodgement led to the commencement of an ATO audit in September 2014 and the ATO revealed an almost unbelievable cascade of events that occurred in the Fund between 2011 and 2014.
The property that was the trigger for the ACR had been a hobby farm of two of the SMSF members and was therefore not an eligible asset acquisition for the Fund (as SMSFs cannot acquire non-business property from members). Despite the purported transfer of the asset, there was no change of title to that of the SMSF trustee (at the time, three individuals), nor did the trustees ensure the title was clear of encumbrance prior to making the property an asset of the Fund. (The CBA had a mortgage registered on the title and, SMSFs can’t allow assets to be used for security of any description.)
As if there weren’t enough problems with this one transaction, the transfer value was not at the market value of the property, which is yet another requirement for SMSF asset acquisition from related parties.
Not put off, and further exacerbating the litany of compliance issues, the SMSF then provided a 2-year rent free lease to a related party in respect of the property looping in the in-house asset rules (and most likely sealing the presence of non-arm’s length income NALI provided by s 295-500 ITAA 1997).
| A single transaction resulted in no fewer than six compliance breaches |
However, the problems weren’t just with this transaction – included in the case facts was; the trustee structuring blowing out to 5 individuals at one stage, forfeiting of a member’s benefits, the SMSF making payments for what were probably personal use by the members, investment in an offshore unlisted entity that is almost too bizarre to believe and, not to be thwarted by the property not being a valid asset of the SMSF, paying for a shed to be built on it.
Inevitably, the trustee was to learn that, as with much in the SIS Act, an action or transaction may contravene more than one provision and, this was found to aid the ATO in coming to a supported case that trustee disqualification was enlivened.
The extensive list of contraventions and breaches examined in this Case are best expressed as a table.
| Action | Breach | SIS (Act & Regulation) Provosion |
| Blurred lines between asset ownership, SMSF cash used for personal purposes | Failed to keep money or other assets separate | Trustee covenant – S52(2)(d); R4.09 |
| Transfer of property owned jointly by 2 members/trustees to superfund. Not business real property or listed security | Intentional acquisition of an asset from a related party | S66 |
| Title included a mortgage | Charge over fund assets | R13.14 |
| Transfer of property at under market value | Market value not used for transaction | S109 (Could invoke s 295-500 NALI provisions of the ITAA 1997) |
| 5 individual members | Ceasing to be a SMSF | S17A(1) |
| Cash payments from the fund to the members | Payment of benefits – no condition of release | R6.18 |
| Several cash payments from the SMSF to members | Providing loans or financial assistance to members/ relatives | S65 |
| Grant of rent free lease to related party | Providing loans or financial assistance to members/ relatives | S65 |
| Acquisition of shares in a related company | Prohibited acquisition at less than market value and/or at greater than the exemption for in-house assets levels | S66, S71 or, S109 |
| Property transferred but title unchanged | Asset of the SMSF not in the name of the trustee | S31(1) R4.09A |
| Transfer of cash from SMSF to build shed on property | Providing loans or financial assistance to members/ relatives | S65 |
| Forfeiture of benefits | Not valid | Trust Deed provisions |
| All of the above | Sole Purpose Test | S62 |
| Non lodgement of annual return – 4 years | Trustee required to lodge returns | S35D |
The ATO asserted that the acquisition of the property was not an allowable asset for the SMSF as it wasn’t business real property and, even it was deemed to be BRP, the grant by the superfund of a two-year rent-free period constituted a lease agreement which is an in-house asset. The Tribunal agreed with the ATO that the property was not business real property at the time of the transfer and the payment by the superfund for the erection of a shed on the property was an example of the fund providing financial assistance to a member.
The defence of the transaction was somewhat brought undone when an affidavit that had been lodged in respect of divorce proceedings between Mr & Mrs Hart was tabled, in which it was claimed that the business (farm) had not traded for 3 years and did not return a profit.
The Tribunal also found that the transfer value was under market further exacerbating the compliance breaches for the SMSF.
In examining the acquisition of the property by the SMSF, the Tribunal determined that the purported in specie transfer did not occur as stated and therefore, any payments from the fund in respect of the property were member benefits.
In fact, several payments made from the SMSF were deemed to be payments to members and not used for improvements in respect of the property, or any investment of the fund.
One purported investment of $100,000 was in a Philippines company of which Mr & Mrs Hart were two of the five directors. The Tribunal found that the shares were not an asset of the SMSF and, if they were, would be an in-house asset.
In a somewhat strange twist, the defendants argued that some of the withdrawals paid to a member were in respect of a terminal illness payment. The member however was not able to produce the requisite medical certification to evidence the existence of a condition that would satisfy that condition of release.
All in all, the fund was cleaned out so it seems only fitting that the primary decision maker in the trustee structure has lost his ticket to ride.
It is however a worry that these breaches can occur without timely identification and whistle blowing.
As the JBWere Technical Services Manager, Kym Bailey, provides support to JBWere Strategic Advisers across Australia. Her role includes analysing and developing technical solutions for client-facing Advisors, as well as providing technical capability training and development to the Adviser Teams, along with the curation of the client document library that is used by Advisors. Often acting as a coach and a sounding-board to Advisors, Kym enjoys distilling the complex into practical, sensible and appropriate solution for clients. Contact Kym at Kym.Bailey@jbwere.com You can also connect with JBWere via LinkedIn
